Miami Bankruptcy: Understanding Chapter 13 Bankruptcy

Chapter 13 is a commonly used form of consumer bankruptcy. Almost all consumer bankruptcies in the US are either Chapter 7 or Chapter 13.  Chapter 7 bankruptcies account for about 70% of bankruptcies, with Chapter 13 accounting for the other 30%. There are many differences between the two bankruptcies, and today we’re going to dig into Chapter 13 bankruptcy in depth.

Income level and the level of assets determine which kind of bankruptcy a consumer will be eligible for. Generally, if you have significant assets or a high income, you won’t be eligible for a Chapter 7 bankruptcy. There are some disadvantages to Chapter 13 – it tends to be a little more complicated and expensive than Chapter 7. It also takes 3 to 5 years for the bankruptcy process to be completed, compared to just a couple of months for the typical Chapter 7.

But there are real advantages to Chapter 13 as well, and for some people it may be a far better choice. One of the most significant advantages is that liquidating property is not a requirement. In fact, a Chapter 13 bankruptcy stops foreclosure in its tracks. It includes a repayment plan, and missed payments can be part of the repayment. Typically, in a Chapter 7 bankruptcy, missed mortgage payments mean the property will be repossessed, so this is a significant benefit of Chapter 13.

This isn’t the only attraction of a Chapter 13 bankruptcy. Delinquent taxes may also be repaid without penalties and interest. A car that you’ve owned for more than two and half years can be paid back at its current value, not the loan amount. Secured debts in general can be paid back over the 3 to 5 year period of the loan, lowering monthly payments.

There are three kinds of debt in a bankruptcy, and the type of debt makes a difference in how it’s repaid, or if it’s repaid. A priority debt, which includes child support, student loans, and taxes, must be paid before any other debt is repaid. Secured debts are debts such as mortgages and auto loans. Mortgages and auto loans more recent than two and half years ago must be paid in full, but with other secured loans it’s the current value, not the loan amount, that must be repaid.

Unsecured debt is a little more complicated. The amount of unsecured debt that needs to be paid is dependent on assets and disposable income. With a Chapter 13 bankruptcy, creditors must receive at least as much in repayment as they would have if a Chapter 7 bankruptcy had been filed. In practical terms, this means that someone with significant assets may have to pay off a lot of unsecured debt.

A debtor must also dedicate all of his or her disposable income to the repayment plan. This means that someone without a lot of assets or disposable income may not have to pay unsecured debts at all, whereas someone with a lot of disposable income may have to pay unsecured debt in its entirety.

Chapter 13 bankruptcy is complicated – but it can offer the opportunity for a “fresh start” for individuals who are struggling with debt. If you’d like to learn more, please contact us today!