If you file for Chapter 13 bankruptcy, also known as reorganization bankruptcy, you can keep your property. In contrast to Chapter 7, your debts are only discharged under Chapter 13 if you pay back all or a substantial amount of your debts over a 3-5 year period. Over the course of the 3-5 years, you will have to make monthly payments to the trustee, and the trustee will disburse these payments to your creditors according to their priority status. Before filing for Chapter 13, you must receive credit counseling from an approved agency.
Debts have different degrees of priority. The debts that must be repaid in Chapter 13 are priority debts including child support, alimony, certain taxes, and wages owed to employees. Your plan must also address your secured debts. Secured debts are those that are secured by collateral, such as a mortgage or car loan. In addition to making regular payments on your mortgage or car through the life of the plan, you will also need to pay arrearages—back payments that you failed to make.
There are special tools are available for certain secured loans under Chapter 13. For example, if you have multiple mortgages on your house, but the junior mortgages are not secured by the value of the house because the value of the house has fallen, you may be able to use lien stripping to remove one or more junior mortgages. Similarly, cars lose value rapidly once they are sold. Under Chapter 13, a debtor can “cram down” a car loan to the amount of the car, assuming certain conditions are met.
Any disposable income left after paying priority debts and secured debts will go towards repaying unsecured debts. Unsecured debts are such items as credit card debt or medical debt, which are usually not secured by collateral. In some cases, you will have nothing left after making the required payments, and you may not have to repay unsecured debts at all. However, if you have anything left to pay the unsecured debts, the trustee will expect you to pay unsecured debts to the extent possible.
Chapter 13 requires you to use disposable income to repay debts, which means you will have to show the trustee and the court that you can afford to pay certain debts in full. If you are unemployed or your income is irregular, you may not be able to file under this chapter.
Chapter 13 will only help you if you are committed to repaying your debts. At the end of the 3-5 years, if you have followed the approved debt repayment plan, you will be able to receive a discharge of your debts, even if some of your unsecured debts are left unpaid. You can also keep your property.
A discharge means that you are no longer liable to pay the discharged debts. However, if you miss payments or stop paying altogether, the trustee will probably ask the court to dismiss your Chapter 13 case without giving you a discharge. In that case, the automatic stay will be lifted, and creditors may resume collecting debts from you. They can continue wage garnishment, file suit, place a lien on your property, and resume all other collections efforts.
