Chapter 13 Bankruptcy
In a Chapter 13 case, the Debtor is required to file a plan of reorganization. The plan proposes to pay creditors over a period of time that usually is not less than 36 months, but cannot be longer than 60 months in length. The Debtor is not required to pay all creditors in full, but the Debtor is required to pay all of his/her net future disposable income to the creditors over the life of the plan. The Debtor is also required to pay creditors at least as much as they would hypothetically receive in a chapter 7.
Chapter 13 bankruptcy is only available to individuals or sole-proprietorships. The Debtor must have a regular source of disposable income. In a chapter 13, the Debtor can retain property that might not be exempt in a Chapter 7 case, so long as the Debtor pays the value of the non-exempt property through the plan. A Debtor will most commonly file a chapter 13 case, as opposed to a chapter 7, in one of two situations.
- First, if the chapter 13 case is filed BEFORE the Sheriff’s sale occurs in a foreclosure proceeding, the chapter 13 filing stops the sale from occurring. In a chapter 13 case, if the value of the home is less than the amount owed on the first mortgage, the Debtor can implement a procedure called "lien stripping" which enables the Debtor to "strip off" second mortgages, or home equity loans, and effectively convert them from secured debts (which cannot be compromised) to unsecured debts (which can be compromised) in a chapter 13 Plan.
- Second, if an individual debtor cannot qualify for a chapter 7, the usual bankruptcy alternative is a chapter 13. If a chapter 13 Debtor successfully completes his/her plan, then he/she receives a discharge of the remainder of the debt, except for those debts that are not dischargeable or that otherwise survive the bankruptcy case.