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How Chapter 13 Works

To a person who has regular monthly earnings, but is struggling to cope up with his debts, Chapter 13 bankruptcy is a good solution. Chapter 13 bankruptcy is designed for people who are able to make sufficient monthly payments for paying off their debts, but needs some time. In Chapter 13 bankruptcy, the debtor does not have to surrender his/her real property, rather needs to pay off the debts in full or part within a specific time period. The court will confirm Chapter 13 bankruptcy only if the judge feels that the debtor can afford monthly payments to the extent of paying off the debts within a stipulated time.

A debtor, before filing a Chapter 13 petition should undergo credit counseling by an agency approved by the United States Trustee’s office. The credit counseling is provided by approved agencies upon payment of a nominal fee. These agencies may also provide free credit counseling to financially backward debtors.

Bankruptcy petitions can be found on various online sites.  Along with the bankruptcy petition, the debtor should also file a repayment plan. The repayment plan will be verified by a trustee appointed by U.S. trustee services.

After filing of the petition and before confirmation, the debtor should attend a creditors meeting. The creditors or their representatives will be present at the meeting to assess the debtor’s financial situation. Once the debtor’s financial situation is verified to their satisfaction, the creditors and the trustee will make recommendations to the court regarding confirmation of bankruptcy.

The repayment plan should ensure that the debts are paid off in three to five years according to his/her monthly income. All priority debts including child support and alimony, employee wages, and tax obligations should be paid off in full. The second priority should be on secured debts such as mortgages and vehicle loans. Payments to unsecured creditors come third in the repayment plan. If the debtor’s bankruptcy case is dealt by an attorney, it is desirable to start making payments to the attorney right after filing the repayment plan. This is beneficial to cultivate the creditors’ and court’s faith in the debtor.

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. The debtor shall be discharged of all obligations except for any long term payments such as home mortgages, child support and alimony, government funded educational loans, any debt arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, debts for restitution or a criminal fine included in a sentence on the debtor’s conviction of a crime, and certain taxes.

In special cases, the debtor may request the bankruptcy court to grant a hardship discharge. This occurs when the debtor, after confirmation of the payment plan, fails to make regular payments as promised. The court usually grants a hardship discharge if the reason for nonpayment was beyond the debtor’s control and not the debtor’s flaw. Hardship discharge may be granted only after the creditors have received at least as much amount as they would have received under a chapter 7 bankruptcy case, and when modification of the plan was not possible. Severe injury or disease that affected the debtor’s capacity for employment and earn regular income can be considered a sufficient reason for granting hardship discharge. If the debtor does not qualify for a hardship discharge, then s/he can convert it to a Chapter 7 bankruptcy.

A debtor who has petitioned for Chapter 7 bankruptcy can convert to Chapter 13 bankruptcy any time before closing of the case provided that the case was not previously converted to Chapter 7 bankruptcy from Chapter 13 bankruptcy.

Inside How Chapter 13 Works