Bankruptcy is the legal status of a person or an organization in debt and unable to repay. People may fall into financial crisis due to a number of problems such as loosing job, foreclosure and mortgage adjustments, or medical issues.

A debtor has the option to choose between Chapter 7 bankruptcy and Chapter 13 bankruptcy. In Chapter 7 bankruptcy, the debts may be written off upon confirmation. However, in Chapter 13 bankruptcy, the debtor gets a chance to pay off all or part of the debts by making regular monthly payments.

Chapter 13 bankruptcy is advantageous to debtors who have regular earnings and willing to pay off their debts. The debtor’s real property will not touched by creditors. The eligibility for a Chapter 13 plan itself is that the debtor has sufficient regular monthly income. Such an individual’s unsecured debts should be less than $360,475 and secured debts under $1,081,400. These amounts are not static and may be adjusted periodically according to changes in the consumer price index.

Once the bankruptcy petition is filed with the bankruptcy court, all legal actions such as collection calls and garnishment of wages will cease. Chapter 13 bankruptcy petition shall be followed by a repayment plan. Before confirmation, the debtor will have to attend a creditor’s meeting. This meeting will be with the creditors directly or with their legal representatives who will make recommendations as to confirmation of bankruptcy.

In a Chapter 13 plan, you make all payments to the trustee. The trustee will have a definite payment pattern. Usually, the trustee will opt to pay priority debts including child support and alimony, employee wages, and tax obligations first. The next preference will be secured debts such as mortgages and vehicle loans. Finally, the trustee will make payments to unsecured creditors. The major advantage of a Chapter 13 bankruptcy is that the creditors who have been provided payment in full or part under the payment plan will no longer pursue the debtor or initiate any other action for collecting money.

In Chapter 7 bankruptcy, all nonexempt property owned by the debtor will be sold, and the proceeds will be used to pay as many of the debtor’s debts as possible. However, in Chapter 13 bankruptcy, a debtor can keep all exempt and nonexempt properties. Any debts that cannot be discharged by Chapter 7 can be reduced under Chapter 13. Any co-signers will also be protected under Chapter 13 bankruptcy. It offers provisions to reduce interest rates on certain loans.

A debtor should be aware that an individual shall not be eligible to file for Chapter 13 plan if a prior bankruptcy petition was dismissed within 180 days prior to second filing. There are a number of things that a person in financial distress can do to overcome the situation, and bankruptcy should be sought as the last resort.