Debt Reduction in Chapter 13

Chapter 13 bankruptcy is considered reorganization of a filer’s debts, but in the end, it is actually still a form of debt reduction. There are several elements of this plan that can allow those debts to be repaid, but on a more manageable schedule. However, some debts may also be discharged at the end of the plan. Learning how to best reorganize debts under chapter 13 can provide the filer with numerous benefits, even within a rather stringent budget.

Chapter 13 Reorganization

All collection efforts are put on hold during a chapter 13 bankruptcy. That hold lasts until the repayment plan is complete or abandoned, allowing the debtor time to pay debts and restore their financial standing. The first step to a chapter 13 bankruptcy, once the paperwork is filed, is to submit a debt reorganization plan.

Chapter 13 bankruptcy is based on a reorganized debt repayment plan that the debtor submits to the court. If the court approves the plan, and the debtor fulfills it, at the end of the repayment schedule most of their remaining debt is generally discharged. That repayment plan is based on the filer’s average monthly income for the six-month period preceding the petition. If that amount is above the median income for the filer’s state, they will be required to propose a five-year repayment plan. If the average monthly income is below that median amount, they will be required to propose a three-year plan.

There is no standard plan under federal bankruptcy laws, but each state or each court may design a formula that filer’s should follow. A chapter 13 bankruptcy plan should include the following:

• Priority debts, such as many tax debts, alimony and child support payments, school loans, bankruptcy administration fees, and wages owed to employees

• Arrearages on secured debts if the filer wishes to retain the property that secures those debts

• As much as possible on unsecured debts

Once the bankruptcy court approves a repayment plan, the filer must maintain those monthly payments throughout the plan. If they do not do so, their bankruptcy may be dismissed, the hold, or stay, on collection efforts is lifted, they may lose their home and car, and they may be taken to court for other debts.

Once the filer completes the repayment plan, any remaining unsecured debt is often dismissed. For some debts, that may mean 100% of that debt is discharged, or none of it; although in many cases, at least enough debt to cover the value of any non-exempt property must first be repaid.

If for some reason, the filer is unable to complete the repayment plan, there are several options:

• Adjusting the repayment plan, at the discretion of the bankruptcy trustee

• Discharging debts based on hardship, at the discretion of the court

• Dismissing the bankruptcy petition and requiring repayment of all debts, plus interest that was not charged during the chapter 13 bankruptcy

Getting Legal Help with Debt Reduction in Chapter 13 Bankruptcy

There are many details of a chapter 13 bankruptcy which may help the debtor, if they know how to take advantage of them. On their own, many filers may not realize all the options that exist. However, with the help of a bankruptcy lawyer they may be able to appropriate the possible benefits under their chapter 13 bankruptcy petition and prepare for a better financial future.