Chapter 13 Bankruptcy:

Once upon a time, filing for Chapter 13 bankruptcy was considered an unintelligent choice, especially with the availability of Chapter 7.

Chapter 13 bankruptcy filing is a way for U.S. citizens to undergo financial reorganization as supervised by a federal bankruptcy court. In other words, a system for repayment of debt is created with the law insuring that creditors get their money back.

Chapter 7 bankruptcy filing, the most common form in the U.S., allows an individual to liquidate certain assets as a form of repayment without having to pay anything more. If a substantial amount of assets do not exist, than the creditor is stuck without repayment from its consumer.

Chapter 7 has long been considered an easy way out for financially-strained individuals, while leaving the creditor out in the dust.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was enacted in order to make filings for Chapter 7 bankruptcy more difficult, forcing those seeking financial restitution to file for Chapter 13 bankruptcy instead.

Referred to as the “New Bankruptcy Law,” the bill makes it more difficult for consumers to erase debt by forcing them to repay their debt through the provisions of Chapter 13.

Under Chapter 13 bankruptcy filing, debtors propose a repayment plan to make installments to creditors over three to five years.

If the debtor's monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period for just cause. If the income is greater than the state median, the repayment plan must be for five years. After the debtor files for Chapter 13 bankruptcy, the law forbids creditors from starting or continuing collection efforts.

The greatest advantage of Chapter 13 is that it saves homeowners from undergoing foreclosure of their house. Individuals can stop foreclosure proceedings and are allowed to cure delinquent mortgage payments over time by filing for Chapter 13.

Chapter 13 bankruptcy filings essentially act like a consolidation of an individual’s loans, which means monthly payments should be lower.

The planned payments are given to a trustee of the court, who distributes the payments to the creditors. For those who are annoyed by creditors and their collection agencies, Chapter 13 eliminates that headache. Creditors are forbidden to have contact with the debtors during the Chapter 13 period. The trustee of the court deals with the creditors.

Co-signers are also free of collection efforts and a negative mark on their credit if repayment is made in full under Chapter 13.

Additionally, an individual’s wages can not be garnished under Chapter 13. And, unlike Chapter 7, no limits are placed on the amount of times an individual can file for Chapter 13 bankruptcy.

As promising as Chapter 13 bankruptcy sounds, opponents view it and its forced legislation under The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 as a way of prolonging (or even adding to) an individual’s financial troubles.

If a debtor has a significant increase in income midway through the three-to-five year period, monthly payments to the trustee may be increased as well. Bankruptcy proceedings for those filing under Chapter 13 last for at least three years; those filing under Chapter 7 have to deal with the bankruptcy court for only four months.

Furthermore, any lump-sum distributions, such as personal injury settlements or inheritances, received during the case normally must be turned over to the trustee. And the individual also has lawyer fees to worry about while filing for Chapter 13 bankruptcy.

The bottom line is the U.S. government, with the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, is trying to protect the creditor while lessening the strain on the financially-strapped individual.

As with anything in life, commitment will dictate the individual’s future. If he or she is committed to following the payment plans under Chapter 13, a promising future remains. If he or she is unable to follow through on that commitment, Chapter 7 might have been a better alternative, and more grief is in store.

Thank you to Javier Moralas for this "Chapter 13 Bankruptcy" article

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