Chapter 13 bankruptcy is a part of the system that's designed to allow folks to restructure their personal debts. You may be wondering, though, what it means to restructure your debts under Chapter 13 bankruptcy law. Here is a breakdown of the different parts of the process and the implications that it may have for you.
Setting Up a Payment Plan
You will be asked by the court to set up a plan to pay your creditors. Rather than paying the full amounts that you owe to all of your creditors, you will propose a reduction that's reasonable based on your ability to pay. For example, someone whose debts exceed their ability to pay by 20% of their disposable income might ask the court to reduce the obligations by 20% to create a better match between income and debts.
Discharge of Debts
Most payment plans are designed to last between three and five years. Presuming the plan has been observed for the full term, the petitioner can then ask the court to discharge the remaining debts. In the previous example, this would mean that the outstanding 20% of debts that weren't paid would be dismissed entirely. The creditors take a loss on that portion of the debts, but they usually come away with more than the majority of what they were owed.
Proving the Ability to Pay
Once you have a repayment plan set out, the Chapter 13 bankruptcy law will also require you to show that you have the resources to pay. This involves laying out the evidence of what your present income is. You'll also want to show what your living expenses are for things like rent, a mortgage, car payments, and utility bills.
Note that the judge has the right to determine you won't be able to pay. Typically, a person in this situation will be encouraged to consider bankruptcy through liquidation, meaning a good portion of their non-essential assets will be sold.
Dealing with Secured Debts
One of the main arguments for going with a Chapter 13 bankruptcy versus a Chapter 7 one is that you may have a greater ability to handle your secured debts. These are things like car loans and mortgages that are backed by real property. In some cases, it may even be possible to strip liens.
Bear in mind that these debts will be restructured, not eliminated, so you'll still have to pay them at the reduced levels. Likewise, a shorter restructuring plan could accelerate some debts, such as 30-year mortgages.
To learn more about Chapter 13 bankruptcy, contact an attorney.