Chapter 13 bankruptcy helps a person reorganize debts and may be one of the best ways to save a home. Over a 3-5 year period debtors make payments to a trustee, who disburses the funds to creditors. Unpaid debts remaining at the end of the 3-5 year period are discharged, just as they would be in a Chapter 7. Secured creditors may be paid by the trustee or directly by the debtor. Unsecured creditors receive payments only if there is income left over each month beyond what is necessary to pay living expenses, secured creditors, and any priority creditors, such as the IRS or a child support obligation.
Chapter 13 is often used to “cure” defaults on residential mortgages and allow homeowners to reinstate delinquent home mortgages. Debtors might also be required to file Chapter 13 if they are above the state’s median income and have income left over after living expenses and debt repayments are deducted. However, just because you're over median income doesn't necessarily mean you must file a Chapter 13. Frequently, because of the deduction of expenses, even people above median income can qualify for a Chapter 7.
Chapter 13 may also be used to keep nonexempt property that would otherwise be sold in a Chapter 7.
There are several reasons why filing Chapter 13 is preferable to a Chapter 7. These include the ability to repay nondischargeable debts like taxes, child support obligations and student loans; the ability to “cram down” the debt on some vehicles; the ability to repay pension loans; the exclusion of child support income from your required budget; the increased protection for co-debtors; the reduced impact on your credit score; and the ability to address complex issues like excess equity in a homestead.
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