Chapter Thirteen
An individual who is badly in debt can file for bankruptcy either under Chapter Seven ( liquidation, or straight bankruptcy), under Chapter Thirteen ( reorganization)or Chapter Eleven, Title 11, United States Code.Debtors may also be forced into bankruptcy by creditors in the case of an involuntary bankruptcy, but only under Chapters Seven or Eleven. However, in most instances the debtor may choose under which chapter to file.
The debtor's financial characteristics and the type of relief sought plays a tremendous role in the choice of chapters. In some cases the debtor simply cannot file under Chapter 13, as he or she lacks the disposable income necessary to fund a viable Chapter 13 plan (see below). Furthermore, Section 109(e) of Title 11, United States Code sets forth debt limits for individuals to be eligable to file under Chapter Thirteen the debt limits for filing Chapter 13 of unsecured debts of less than $336,900.00 and secured debts of less than $1,010,650.00. These debt limits are subject to annual cost of living increases and represent values updated through April 1, 2007.
Under Chapter Thirteen, the debtor proposes a plan to pay his creditors over a 3 to 5 year period. During this period, his creditors cannot attempt to collect on the individual's previously incurred debt except through the bankruptcy court. In general, the individual gets to keep his property, and his creditors end up with less money than they are owed.
Disadvantages of Chapter Thirteen
The disadvantage of filing for personal bankruptcy is that a
record of this stays on the individual's credit report for 10 years.
During the pendency of a Chapter Thirteen case the debtor is not
permitted to
obtain additional credit without the permission of the bankruptcy
court. Moreover, creditors may not be willing to risk lending money to
such an individual. However, this disadvantage is not unique to Chapter
Thirteen; it may also apply to individuals currently in a Chapter
Eleven case
or those who are in or have recently been in a Chapter Seven case.
Advantages of Chapter Thirteen
The advantages of Chapter Thirteen over Chapter Seven include: the ability to stop foreclosures and to have a mortgage that has been accelerated declared reinstated upon bankruptcy plan completion; to achieve a super discharge of debts of kinds not dischargeable under Chapter Seven; to value collateral; to bifurcate the security interest of creditors in certain property that creditors are either charging too much interest for, or are over-secured, or both, and in some cases; to prevent collection activities against non-filing co-signers (co-debtors) during the life of the case.
The Chapter Thirteen Plan
A Chapter Thirteen plan is a document filed with or shortly
after a
debtor's
Chapter Thirteen bankruptcy petition.
The plan details the treatment of debts, liens, and the
secured status of assets
and liabilities owned or owed by the debtor in regard to his bankruptcy
petition. In order for plans to take effect, it must meet a number of
requirements. These are specified in § 1325 and include:
- providing
that unsecured creditors will receive at least as much through the
chapter 13 plan as they would in a chapter Seven liquidation
- either not be
objected to,
repay all creditors in full, or commit all of the debtor's disposible
income to the Chapter Thirteen plan for at least three years (or five
years
for a debtor who makes an above median income)
Credit Counseling
Credit counseling is a process offering education to
consumers
about how to avoid incurring debts that cannot be repaid. This process
is actually more debt counseling than a function of credit education.
Credit
counseling often involves negotiating with creditors to establish a
debt management plan (DMP) for a consumer. A DMP may help the debtor
repay his or her debt by working out a repayment plan with the
creditor. DMPs, set up by credit counselors, usually offer reduced
payments, fees and interest rates to the client. Credit counselors
refer to the terms dictated by the creditors to determine payments or
interest reductions offered to consumers in a debt management plan.