Chapter 13 bankruptcy is often referred to as ‘reorganization bankruptcy’. Unlike chapter 7 bankruptcy which requires debtors to sell assets to pay outstanding debts, Chapter 13 lets petitioners keep assets as long as they adhere to a court approved repayment plan.
Chapter 13 bankruptcy extends payment terms with creditors and allows debtors to repay debts over a period of three to five years. Debtors are required to submit chapter 13 payments to a bankruptcy Trustee who distributes monthly payments to creditors.
If debtors are unable to abide by reorganized debt payments, creditors can petition the court and request the bankruptcy petition be dismissed. When debtors fail out of bankruptcy, the judge can either allow them to file Chapter 7 or dismiss the petition.
If Chapter 13 petitions are dismissed, debtors lose protection from the court and creditors can initiate collection actions, including foreclosure. This can be particularly harmful to debtors who file bankruptcy to stop foreclosure.
Once debtors fail out of bankruptcy, lenders commence with foreclosure proceedings at the point where they left off prior to the debtor filing for chapter 13. In many cases, foreclosure can commence within a matter of days.
Debtors can file for personal bankruptcy without legal assistance, but this is not advised. New bankruptcy laws established in 2005 require debtors to follow specific protocol outlined in the Bankruptcy Abuse Prevention and Consumer Protection Act. BAPCPA is exceptionally complicated and few people can adhere to the policies without assistance from bankruptcy attorneys.
When possible it is best to consult with three or more lawyers prior to filing Chapter 13. Organize financial records including pay stubs, bank statements, investment statements, alimony, child support, and expenses prior to meeting with attorneys.
Bankruptcy lawyers prepare and present petitions to the court. Shortly thereafter, a 341 creditors meeting is scheduled. Debtors are given the opportunity to explain their circumstances to creditors and present their proposed repayment plan during the 341 meeting. Creditors who want to be included in the repayment plan must submit claims within ninety days of the meeting.
BAPCPA requires all debtors to repay a portion of their debts when possible. The amount to be repaid under chapter 13 is determined by the means test; a financial tool that compares debtors income to their states’ median income level.
Individuals who earn equal to or greater than median income levels are required to file chapter 13 bankruptcy. Individuals who earn less might be eligible for chapter 7.
It is important for debtors to realize a large percentage of disposable income must be contributed toward repayment of debt. Additionally, debtors cannot incur new debt during the repayment period unless approved by the bankruptcy Trustee.
Before deciding to file for chapter 13 bankruptcy it is strongly recommended to conduct research via the Internet or by consulting with a bankruptcy attorney. Bankruptcy has far-reaching effects that can haunt debtors for ten years and cause serious harm to their credit. Consider bankruptcy alternatives such as debt consolidation, debt settlement, credit counseling and budgeting before petitioning the court for debt relief.
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