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Chapter 13

Payment Plan for People with Regular Income

Basic Operation
Obtain mandatory credit counseling within180 days prior to bankruptcy. If a debt management plan is proposed, that should be filed as well. File bankruptcy petition and proposed payment plan with court. Payment plan provides payments over a period of three to five years. As a result of new law, more plans will be for five years. Payments are made from disposable income (i.e., whatever is left over after necessities [food, shelter, etc.] have been allowed for), while debtor retains assets. 
For debtors owing less than $307,675 in unsecured debt and less than $922,975 in secured debt. 
Percentage of consumer filings
There were 449,129 chapter 13 filings in 2004, about 29% of the total. Chapter 13 filings likely to increase in the wake of the 2005 bankruptcy law. 
Chapter 13 discharge won’t be granted if debtor received discharge in Chapter 7, 11, or 12 four years earlier or more or a previous Chapter 13 discharge two years before. 
Effect on debts
All or a portion of debts paid off over a period of time under a specific plan. With exceptions noted in text (e.g., student loans, support obligations) debts are discharged. Liability to creditors ends when plan is successfully completed and the court enters a discharge order. 
Effect on home
Home will be preserved if plan is successfully completed and if there is not substantial non-exempt equity. If not preserved in this way, home may be preserved under homestead exemption or marital ownership law. However, the new bankruptcy law provides for homestead exemption of no more than $125,000 if home acquired 40 months before filing or if debtor engaged in certain fraudulent conduct.
Effect on car or truck
Vehicle will be preserved if plan is successfully completed and appropriate payments made. If not, it might be taken by creditors (unless arrangements are made to pay off lien).
Effect on nonexempt assets
No effect if plan is successfully completed. If not, non-exempt assets are sold to pay creditors, as in Chapter 7 bankruptcy.
Time to repay
Usually three years, sometimes up to five years.
All “disposable income” is available for payments; that is, whatever remains after necessities (food, shelter, etc.) are taken care of. New law changes Chapter 13 by providing that what is reasonable to pay will be determined in large part by IRS regulations.
Portion of debt repaid
May allow for payment of less than the full amount of debts
Result at conclusion of bankruptcy
Borrower is no longer liable for most debts if plan is successfully completed and discharge is ordered by court.
Requirement for bankruptcy proceedings to end
Borrower must have made all payments in accordance with court-approved plan, after which court enters discharge order.
Effect on credit
Record of bankruptcy filing may remain on your credit report for up to ten years from the date of filing, although some creditors will report a Chapter 13 bankruptcy for only seven years. Creditors may prefer to see this form of bankruptcy, since successful completion of plan may pay more debts than will be paid under a Chapter 7 filing.