Chapter 13 bankruptcy is also known as consumer reorganization, repayment, or a wage earner plan. Monthly payments are made for a three to five year period through the bankruptcy court to repay your debts. While some debts have to be paid in full, others can be written off in Chapter 13 so the payments made can be much more affordable and provide a lot of relief financially.
Chapter 13 is appropriate in three main circumstances:
1) MEANS TO PAY: When your income and expenses are examined, it appears that you can afford to make payments. If you are able to make payments, you may be required to file Chapter 13 instead of Chapter 7 and pay your discretionary income towards your debts.
The starting point for this determination is through a complicated and convoluted calculation called “The Means Test”. This is best administered by an experienced bankruptcy attorney since many people incorrectly believe they must file for Chapter 13 simply because they don’t understand how to apply the Means Test.
2) REORGANIZATION OR CURE OF DEBT: When you are behind on a debt that you must pay and you need time to catch up, or your payments are too high, Chapter 13 lets you spread out payments over the plan period of 36-60 months instead of a lump sum or shorter payment period. Typical debts are taxes due, or secured debts with collateral like mortgages, homeowners, and car loans. Filing Chapter 13 can stop a foreclosure or car repossession in its tracks, and even stop garnishments and levies by the IRS or State.
What makes a Chapter 13 plan payment on those debt easier is that your other debts for unsecured loans like credit cards and medical bills can be substantially reduced or even eliminated for many people, freeing up income to pay on the secured and tax debts that have to be paid.
3) PROTECT PROPERTY FROM CREDITORS: When you are sued by creditors or you file for bankruptcy, a certain amount of your property can be exempted/protected.
If you own more than the exemption allowed, you may be able to keep that property if your plan pays enough to cover the value your property exceeds your exemption allowance. This allows protection of homes that might have more equity than is protected by a homestead or residence exemption, or a treasured family heirloom.