Chapter 13 Bankruptcy is a bankruptcy process that allows the debtor(s) to repay their debt, partially or fully, over time. Its use is required when certain income tests are made. Otherwise, it is optional. It is most useful when the debtor(s) want to save a home or there is too much equity in the debtor(s) home. It is also useful when there are significant IRS problems or student loan debt.

In a chapter 13 case we first prepare a budget based upon the debtor(s) net income and average monthly expenses. We include secured debt payments, such as a car and/or mortgage payment. Whatever is left over after the budget is prepared is used to repay unsecured debts, such as credit card debts over the life of the plan.

Here are some very simplified examples:

Joe and Mary come to me because they are several months behind on their mortgage, totaling $3,600. They have $14,400.00 in credit card debt. They make $3,500 net per month. They have a mortgage payment of $1,000.00 per month, car payments of $500.00 month. Their monthly expenses are $1,000. So, we have $500.00 per month left over after meeting their expenses and secured debt payments. The first $100.00 of this will go to pay the amount they are behind on their mortgage – it will caught up at the end of a 36 month plan. The remaining $400.00 will go to pay the credit card debt. At $400.00 per month the credit card debt will be paid in full in 36 months.

There are three advantages for Joe and Mary under this hypothetical. First, they can catch up their mortgage and save their home from foreclosure. Second, because of the Automatic Stay (see the article entitled “Bankruptcy Stops Debt Collector Harassment!”) any pending foreclosure, garnishment, or just simple harassment stops while they are in bankruptcy. Third, all interest on the credit card debt stops as of the filing date – saving them thousands of dollars.

Here’s another hypothetical. Instead of $14,400.00 in debt Joe and Mary have $28,800.00 in credit card debt. At $400.00 per month there is only enough money to re-pay 50% of this over the 36 month plan. At the end of the plan Joe and Mary will get a discharge (forgiveness) of the remaining 50%.

The advantages here are the same as before with the additional advantage of the discharge. Chapter 13 requires that the debtor(s) pay as much as they can afford into the plan – but also allows forgiveness of whatever debt can’t be repaid. Theoretically, debtor(s) can repay as little as 1% of their debt.

What is the Difference Between the Discharge and the Automatic Stay?