Chapter 13 bankruptcy helps a person reorganize debts. 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 plan 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 may receive payments 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 may 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. Chapter 13 may also be used to keep nonexempt property that would otherwise be sold in a Chapter 7 but creditors must still receive as much over time as they would 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.