Chapter 13 Bankruptcy

Chapter 13 bankruptcy is often filed in one of these scenarios:
  1. The debtor's income is too high (based on the means test) to qualify for Chapter 7
  2. The debtor needs to use Chapter 13's special rights to stop a foreclosure and make up missed mortgage payments through the payment plan
  3. The debtor wishes to retain property that would otherwise be sold by a Chapter 7 trustee
So it is often oversimplified to call Chapter 13 a repayment plan. Let us look at each of these scenarios.

High income: The means test used to test one's qualifications to file Chapter 7 becomes a method for calculating disposable income when one's income is too high to qualify for Chapter 7. This monthly disposable income figure usually becomes the minimum standard for determining the monthly payment for a five-year payment plan in Chapter 13. The result could be that only a fraction of unsecured debts or 100% of them is paid, just depending on the debtor's disposable income and budget considerations.

Stop foreclosure: Georgia has been one of the leading states for high numbers of Chapter 13 filings precisely because Georgia law makes foreclosure such an easy process for lenders. When Chapter 13 is filed, bankruptcy rules apply, not the terms of the security deed or the lender's internal policies. Chapter 13 allows the arrearage on mortgage to be paid over the term of a three- to five-year payment plan. If the debtor has no disposable income under the means test (and if there is no other property to sell or cash in), then the unsecured creditors may receive nothing under the plan, the same as in a no-asset Chapter 7 case.

Retain property: Sometimes the debtor has property that could be sold to pay creditors inside a Chapter 7 bankruptcy or outside bankruptcy. For example, the debtor may be forced to sell her home or other real estate in Chapter 7, or else she may have to satisfy judgment liens outside of bankruptcy. Chapter 13 allows the alternative of making payments equal to the value of that property through the payment plan. It is a good option when bankruptcy exemptions allow the debtor to retain a greater amount of equity or the debtor needs to protect property from being taken through involuntary means (such as attachment or garnishment).

Chapter 13 still results in the same discharge of debts as a Chapter 7 case would, and technically more debts are eligible for discharge under Chapter 13.

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