Chapter 13 Bankruptcy: What it means?

2006-01-12

The most common form of personal bankruptcy in the United States is the so called Chapter 7 bankruptcy. During a personal chapter 7 bankruptcy, all assets - except certain indispensable property that is exempt – are sold and converted into cash in order to pay off the creditors. A personal bankruptcy under chapter 13 bankruptcy law is instead a way for individuals to perform financial reorganization while supervised by a federal bankruptcy court. The aim of Chapter 13 of the U.S. Bankruptcy code is to provide debtors that are still earning an income with a way to rehabilitate their economy under chapter 13 bankruptcy law. Instead of going through a drastic chapter 7 bankruptcy, an individual can go trough a 3 to 5 year long court approved pay back plan under chapter 13 bankruptcy law.

Whether you should apply for a Chapter 7 bankruptcy or filing Chapter 13 bankruptcy is determined by several factors, and one of them is your current disposable income. If your disposable income is too low, filing chapter 13 bankruptcy will be impossible for you. When filing chapter 13 bankruptcy, you must show that you can provide a meaningful payback to the creditors. If you can not do this, filing chapter 13 bankruptcy will not be allowed. The word “meaningful” carry different weight in different districts, and can vary from 1 percent to 20 percent. You must also show that the unsecured creditors will receive at least as much pay back under chapter 13 bankruptcy law as they would if you filed a Chapter 7 bankruptcy instead of filling chapter 13 bankruptcy. If they would receive more money from a Chapter 7 bankruptcy, filing chapter 13 bankruptcy will be out of the question. After filing chapter 13 bankruptcy, a Chapter 13 plan will be created according to the rules in chapter 13 bankruptcy law. This is a document that details how your debts and liens should be treated and it will also show the secured status of assets and liabilities owned or owed by you.

The advantage of filing chapter 13 bankruptcy is that you will be protected from collection action as long as you follow the plan that has been set up in accordance with chapter 13 bankruptcy law. Filing chapter 13 bankruptcy and following it through will also discharge the unpaid balance when the plan is finished after 5 years. A chapter 13 bankruptcy plan will be enforced by the court according to chapter 13 bankruptcy law, so even unwilling creditors must accept it. Filing chapter 13 bankruptcy will also put a halt to the running of interest on credit card debts. Compared to a Chapter 7 bankruptcy, a Chapter 13 bankruptcy will include a lot of debts that are never discharged by a Chapter 7 bankruptcy. A Chapter 7 bankruptcy is faster, while a bankruptcy under chapter 13 bankruptcy law can provide you with a better start once you have finished the pay back plan. You should always weigh the pros and cons of filing chapter 13 bankruptcy law and filing chapter 7 bankruptcy law before you make up your mind.

During the pendancy of your Chapter 13 case, you will not be allowed to obtain new credit without the expressed permission of the Chapter 13 Trustee\\\\\\\'s. Just like a Chapter 7 bankruptcy, the Chapter 13 bankruptcy will be noted on your individual credit report and stay there for 10 years which will also affect your ability of obtaining credit at favorable terms.

The recent changes to the U.S. Bankruptcy law that became effective in October 2005 changed several important aspects of the Chapter 13 bankruptcy law. It is therefore important that you do not relay on old guidelines and recommendations when you decide whether or not filing chapter 13 bankruptcy is the right thing for you. The allowed discharges in Chapter 13 bankruptcy law has for instance been limited and the law is today more similar to the Chapter 7 bankruptcy law when it comes to some types of discharges. You will for instance not be discharged from tax claims for which no claims were filed, or from debts that are tinged with fraud.

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