Chapter 13

What Is Chapter 13?

Chapter 13 is a bankruptcy category in the United States. It allows an individual with regular income to repay all, or a significant portion, of their debts within three or five years. This is under a court-ordered repayment plan.

Deeper Definition 

Generally, bankruptcy is a legal proceeding that allows people to seek relief from some or all of their debts. The Chapter 13 bankruptcy category is for people who are overwhelmed by the weight of their debt but still have a steady source of income that will allow them to pay off the debt if given enough time, typically between three to five years.

The Chapter 13 bankruptcy code of the United States allows debtors with a steady source of income to propose a plan that reorganizes their financial affairs to accommodate the clearing of various debts owed to creditors. The bankruptcy court has the power to approve a debtor’s payment plan without seeking approval from their creditors as long as it meets the statutory requirements. While under the bankruptcy court’s protection, creditors are forbidden to continue collection efforts except through the bankruptcy court.

Though some bankruptcy codes, such as Chapter 7, can release a debtor from debts and allow them to make a fresh start, the Chapter 13 bankruptcy code is not one of such. Under Chapter 13, a debtor must still pay off most or all their debts. For instance, a debtor must pay student loans, taxes, and secured debts in full. However,  if unpaid unsecured debts are at the end of the repayment plan, the court will forgive the debts.

The Chapter 13 protection allows debtors to consolidate their debts into a monthly payment to an impartial bankruptcy trustee who distributes the money to the creditors. The most significant advantage is that it provides debtors the opportunity to save their homes from foreclosure. Although, they must still make all mortgage payments in their payment plan.

Chapter 13 Example

Moses lost his job some months back, making him unable to meet his mortgage debt of $50,000. As luck would have it, when the bank initiated foreclosure proceedings, Moses received a job offer. Realizing that he can pay off the loan if given some time, he heads to the bankruptcy court. At the court, he files a Chapter 13 bankruptcy. The court orders the bank to stop the foreclosure proceedings. Moses proposes a plan to pay the $50,000 mortgage debt by making monthly payments from his salary over three years.