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Chapter 13 Bankruptcy

A chapter 13 bankruptcy is basically a good-faith repayment plan. You pay what you can afford for anywhere from three to five years, depending on your circumstances. After the payment plan is over, the obligation to pay any debt that remains is eliminated, or “discharged,” unless the debt is one of the kinds that cannot be discharged.


Why file a chapter 13?


A chapter 13 bankruptcy offers flexibility and financial rehabilitation that a chapter 7 does not. Where the goal of a chapter 7 bankruptcy is simply to eliminate the obligation to pay certain debts, in a chapter 13, the goal is usually some sort of financial reorganization — for instance, eliminating the obligation to pay credit card debt while at the same time catching up on mortgage arrears (i.e. past due payments) or paying a debt that can’t be discharged, like certain taxes or child support.


One of the most common reasons people file chapter 13 bankruptcy is to stop a foreclosure and have a chance either to modify their mortgage loan or catch up on their mortgage payments over time.


In a chapter 13 bankruptcy you may be able to:

  • catch up on your mortgage payments over five years and avoid foreclosure

  • “strip off” (i.e. remove from the property) mortgages that are 100% underwater

  • sell certain property and protect the equity from creditors

  • pay past due taxes, alimony and child support

  • keep your luxury property and instead, pay its value back to your creditors over time


The "Means Test"


Another reason someone might file a chapter 13 bankruptcy is because they can afford to pay something back, they just can’t afford to pay everything back–at least not on the terms required by the creditors.


If your income is higher than most people’s and you have money left over every month, then you might have the means to pay a percentage back to your creditors. The law provides a formula for determining what you can afford to pay every month based on your income and your expenses — this is the “means test.”


The idea is that if you make more money than most people and you don’t have any exceptional expenses, then it’s only fair that you pay back what you can, at least for a while. After the five year payment plan has been completed, your obligation to repay any remaining debt is eliminated, or “discharged,” unless the debt is of a kind that cannot be discharged.


If you think a chapter 13 bankruptcy might help you, you should talk to an attorney. I would be happy to talk to you. 

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