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Chapter 13

Why do some people file Chapter 13 instead of Chapter 7?

People file Chapter 13 usually for one of three reasons: (1) because they want to save a home that is in foreclosure, (2) because they have so much income that they can't qualify for Chapter 7, or (3) because they want to keep some valuable non-exempt asset they would have to give up in a Chapter 7.

The trade.

In a way similar to Chapter 7, you make a trade with the Court in a Chapter 13. You give up something and you get something. But instead of giving up excess property (as in a Chapter 7), in a Chapter 13 you give up "excess income" for a period of time -- but you keep your property.

Chapter 13 plan payments.

What do we mean by excess income? It's monthly income you receive that is over and above your monthly budget needs. So, with some guidance from the bankruptcy law, you make up a monthly budget with no luxuries. This is your Chapter Thirteen Plan. You can put in your budget your mortgage payment, your insurance premiums, and money for food, electricity, medical needs, Internet access, phone, taxes, car payments and so forth. The budget should reflect a "tightening of the belt." That budget represents your basic monthly "needs." Any monthly income you receive that is over this budget you give up to the court (because you don't "need" it) and that money is divided among your creditors each month. This arrangement is called your Chapter 13 Plan and represents your best effort at repayment. And that is what the Court requires of you in a Chapter 13 – your best effort at repayment for a set period of time, usually 5 years. But what do you get in return?

Chapter 13 debt relief.

Your best efforts may not be enough to pay your creditors in full, even after 5 years of payments. What happens is that at the end of your Plan, when you have made all your payments, the Court forgives any remaining (unpaid) balances on debts like credit cards and all the other kinds of debts that are forgiven in a Chapter 7. And just like in a Chapter 7, you will still owe any remaining student loans, child support, etc. Importantly, Chapter 13 (and not Chapter 7) can help you get current on a mortgage that has fallen behind (even if a foreclosure suit has been filed) and so stop a foreclosure from going to public auction. Also, some people file Chapter 13 without any desire for debt forgiveness; they just want more time to pay their debts in full, and Chapter 13 allows them to stretch out repayment to a pace they can manage.

Summary of your choices between Chapter 7 and Chapter 13.

To sum up, if you can't afford to pay your creditors anything, you get forgiveness of your debts in a Chapter seven with the only requirement that you give up any non-exempt property. On the other hand if you can afford to pay something to your creditors, you pay what you can afford for a limited period of time in a Chapter thirteen and then get forgiveness of what you were unable to pay. In both kinds of bankruptcy the amount of debt forgiveness can be huge and put you into a much better financial situation.

A final note: Chapter 13 debt limits.

Unlike Chapter 7, Chapter 13 has limits on how much debt you can have. To qualify for Chapter 13, an individual's unsecured debts must be (as of April 1, 2013) less than $383,175 and secured debts must be less than $1,149,525. If you don't qualify for a Chapter 7 because you have too much income, and you don't qualify for Chapter 13 because you have too much debt, then your only remaining choice is Chapter 11.

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