Bankruptcy can help lessen the financial challenges faced by debtors. Chapter 7, for example, allows liquidation of assets. But, Chapter 13 allows debtors to hold on to assets and pay off debts through a repayment plan.
A repayment plan is the main feature of Chapter 13 bankruptcy. A debtor must attend credit counseling. In these sessions, a counselor will help create a repayment plan that is practicable and reflects the amount of disposable income held by the debtor. A court must find that this plan is acceptable, because plans usually allow debtors to pay less than the amount they owe. Creditors have the opportunity, however, to object to this plan. An unacceptable plan may be modified. The debtor is responsible for making payments to a trustee if the court accepts the plan.
A Chapter 13 bankruptcy repayment plan usually takes three to five years, compared to six months for a Chapter 7 plan. Courts may discharge a Chapter 13 bankruptcy earlier if the debts are repaid quicker. A Chapter 13 bankruptcy will also remain on credit reports for seven years, instead of 10 years for Chapter 7.
Another advantage that Chapter 13 has over Chapter 7 is that debtors may keep assets, such as their home. But, they must keep up with their mortgage payments and their repayment plan. The stay on foreclosure remains in effect only if all the plan’s requirements are met. Any missed payments will lift the stay and creditors may collect on debts.
Chapter 13 requires repayment of priority debt in full. Debt such as taxes, child support and student loans cannot be reduced or discharged. Likewise, payments must be current, and a repayment plan will also cover secured debt, such as a mortgage or a loan on a car, or anything else that may be repossessed. Unsecured debt is more flexible and some of it may be forgiven. This debt usually includes items such as medical bills or credit card debt. The court will rule on how much of unsecured debt must be paid.