Chapter 13 Bankruptcy: The Alternative to a Chapter 7 Filing

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Bankruptcy Laws | Chapter 7 Bankruptcy | File for Bankruptcy | Chapter 13 Bankruptcy

When you are severely in debt and unable to repay your creditors, bankruptcy filings might be the most feasible option to eliminate your current debt and begin rebuilding your credit for the future.

The most common type of Bankruptcy filing is Chapter 7, where a trustee collects and sells your assets in order to repay your debts. There are however, eligibility criteria you must meet before you can proceed with filing. If you are deemed ineligible to file Chapter 7 bankruptcy, another filing option that allows individuals to reorganize their debt and retain many of their assets, including personal property, is the Chapter 13 plan.

Chapter 13 Bankruptcy

So what exactly is Chapter 13 bankruptcy? is a bankruptcy filing that reorganizes debt and is available to debtors who are currently receiving stable income. Those who file for Chapter 13 bankruptcy will repay their debt through a court approved debt repayment plan versus having their personal property sold (as it is under Chapter 7).

While Chapter 7 discharges debt through the seizing and selling of assets, Chapter 13 centers on a three- to five-year debt repayment plan which can be pursued by the debtor if they have enough disposable income to make the monthly court-ordered debt repayments.

Benefits of filing a Chapter 13 bankruptcy versus a Chapter 7 bankruptcy include:

  • Chapter 13 filings can halt home foreclosures (referred to as an “automatic stay”)
  • Chapter 13 allows individuals to retain non-exempt property (property that would be liquidated under Chapter 7)
  • Provides a “co-debtor stay” that protects co-signers from creditors
  • If you are filing as a sole proprietor of a business, you can continue running your business
  • Filing for a Chapter 13 will appear on the individual’s credit report for up to 7 years as opposed to 10 years with a Chapter 7 filing

Eligibility for Chapter 13 Bankruptcy

Disposable income is the most important criteria in determining if an individual is eligible to file for Chapter 13. The ability to repay a set amount of debt every month for five years is a major commitment.

You will have to prove to a court of law that you have enough stable, disposable income to repay some or all of your debts over the course of an approved three- to five-year debt repayment plan. Individuals with irregular or low income will likely not qualify for this form of bankruptcy protection.

Another eligibility requirement depends on the total amount of debt you currently owe. To qualify for a Chapter 13 filing, your secured debts (mortgage, car loan, etc.) cannot exceed $1,010,650, and your unsecured debts (credit cards, student loans, medical bills, etc.) cannot exceed $336,900.

If your debt falls within these requirements, you must then receive credit counseling from an agency approved by the U.S. government. You can see a list of approved agencies by visiting the Credit Counseling and Debtor Education page of the U.S. Trustee Program website. These agencies are allowed to charge you a fee for their services, but this fee can be free or reduced if you are unable to afford it.

Legal Help

As with any serious financial decision, filing for Chapter 13 bankruptcy has long-term consequences that should be heavily considered before action is taken. Speaking with an experienced bankruptcy attorney is critical in determining which – If any – bankruptcy option is right for your specific circumstances.