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Chapter 13 bankruptcy is the reorganization of an individual consumer's debt with a new payment schedule. If you have too much disposable income to qualify for chapter 7 or have assets you want to protect, you may want to consider this code. Your debts must be below a certain level and you must have steady income.

With this chapter the debtor reaffirms to pay all or a part of their debt. The amount of repayment can range from 10% to 100% depending on the debtor’s income and the composition of amount owed. This code allows the debtor to restructure their payments and set up a new payment schedule (usually 3-5 years) that is more manageable.

For an individual to qualify under this code unsecured debt may not exceed $250,000 and secured debts $750,000. Payments are made to secure creditors first to the extent of their secured interest and priority. Non priority creditors may be partially paid- credit cards and some taxes etc. In general, creditor approval is not required. Secured creditors can object to the repayment plan however, the court can force acceptance. (Cramdown)

This form of bankruptcy is used when the petitioner has property they want to keep like a mortgage that is about to be foreclosed on and other non-exempt assets that would be liquidated under chapter 7. Filing under this code will also halt all collection and foreclosure proceedings (including IRS) and allow the debtor to catch up on their payments and reinstate their original agreement. Your payments will be made to a Trustee who will disburse them in a manner called for in the court-approved plan. During this time the Trustee will have control over your (personal) finances and any credit-related matters will have to be cleared through him.

Who should consider this chapter?

* If you are behind on your mortgage and need to catch up or if you owe the IRS. 

* If the assets you want to protect would be liquidated under a chapter 7 and your disposable income is to high to qualify for a chapter 7.

* If you need relief from collection proceedings or if you wish keep your obligation to pay your creditors and need some breathing room. 

* If you wish to leave the option of filing a chapter 7 at some time in the future. If you are a farmer who does not qualify for chapter 12 and have debt unrelated to farming. 

* You filed chapter 7 sometime in the past 6 years. You have a co-signer. If you could pay your debts within 3-5 years.

Downside of Chapter 13

Chapter 13 ruins your credit. It will remain on your credit report for up to 10 years. It will also cost you more for any credit you do get in the form of higher interest rates. The Trustee appointed to oversee the completion of your filing may charge up to 8% of the amount filed on. You will have to pay attorneys, court and filing fees up front.

Alternatives

If your debts are primarily unsecured debt, (credit cards, medical bills, unsecured loans etc.) you may want to consider debt restructuring through a credit counseling or debt management agency who specializes in consolidation of unsecured debt.