Legal Definitions - Chapter 13 bankruptcy

Chapter 13 bankruptcy is a type of bankruptcy designed for individuals with a regular income who wish to repay their debts over time through a structured plan, rather than having their assets sold off (liquidated). It is often referred to as a "reorganization bankruptcy" for individuals because it allows debtors to keep their property while making payments to creditors over a period, typically three to five years.

The core purpose of Chapter 13 is to help individuals who are struggling with debt but have a steady income to manage their financial obligations. Under a Chapter 13 plan, the debtor proposes a payment schedule to the bankruptcy court, outlining how they will repay all or a portion of their debts. This plan must be approved by the court and usually involves making a single monthly payment to a bankruptcy trustee, who then distributes the funds to various creditors. Upon successful completion of the entire repayment plan, many remaining debts are legally discharged, meaning the debtor is no longer obligated to pay them.

Key benefits of Chapter 13 include the ability to prevent foreclosure on a home, stop vehicle repossessions, and consolidate various debts into one manageable payment. Unlike Chapter 7 bankruptcy, which often involves selling non-exempt assets to pay creditors, Chapter 13 allows debtors to retain their property, provided they adhere to the court-approved repayment plan.

• Example 1: Saving a Family Home from Foreclosure

  Maria and David both have stable jobs and own a home, but a sudden, prolonged illness led to significant medical bills and a temporary reduction in Maria's income. They fell behind on their mortgage payments and are now facing foreclosure. They also have substantial credit card debt. Despite their current financial strain, their combined regular income is sufficient to cover their ongoing living expenses and make some debt payments if structured properly. By filing for Chapter 13 bankruptcy, Maria and David can propose a repayment plan that allows them to catch up on their overdue mortgage payments over several years, while also addressing their other debts. This enables them to keep their home and avoid immediate liquidation of their assets, demonstrating how Chapter 13 helps individuals with regular income reorganize debts to protect their property.

• Example 2: Consolidating Overwhelming Debt While Keeping Essential Assets

  Robert is a salaried software developer who accumulated significant credit card debt, a car loan, and personal loans after a period of unexpected unemployment and costly home repairs. Although he is now back to full-time work with a good income, the minimum payments on all his debts are too high for him to manage, and he's worried about losing his car, which he needs for work. Robert files for Chapter 13 bankruptcy. His bankruptcy plan consolidates all his eligible debts into a single, affordable monthly payment based on his income and expenses. This allows him to keep his car and other personal property, as he is making consistent payments towards his debts through the trustee. This illustrates Chapter 13's function in allowing individuals with regular income to manage and repay debts without sacrificing their essential assets.

• Example 3: Addressing Personal and Business Debts for a Sole Proprietor

  Sarah runs a successful freelance photography business as a sole proprietor. Due to a major client defaulting on a large payment, Sarah's business incurred significant operational debt, which spilled over into her personal finances, including overdue vendor invoices and business credit card balances. While her business is now recovering and generating a steady income, she needs time to pay off the accumulated debt without shutting down her operation or losing her personal assets. Sarah can file for Chapter 13 bankruptcy as an individual. Her repayment plan would incorporate these business-related personal debts, allowing her to continue operating her business, maintain her personal assets, and systematically repay her creditors over a set period. This highlights how Chapter 13 can provide relief for individuals whose personal and business debts (as a sole proprietor) have become intertwined, enabling them to reorganize and recover.