Chapter 13 Rules

When an individual or an organization goes bankrupt, Title 11 of the Bankruptcy Code of the United States provides various chapters under which the bankrupt entity can file for bankruptcy. These chapters are numbered 7, 9, 11, 12, 13 and 15. Each of these chapters are alternative options when filing for bankruptcy and prescribe a different set of rules. Of these, the two most popularly used types of bankruptcy chapters, by individuals, are 7 and 13. While Chapter 7 bankruptcy deals with liquidation of assets and property to help pay off the debts, Chapter 13 bankruptcy deals with the reorganization of the debts.

What is Chapter 13?

Let us first see what is the difference between Chapter 7 and Chapter 13. Chapter 7 deals with absolute liquidation. To put it very simply, when you file for bankruptcy under Chapter 7, the court takes possession of all your assets, sells them and pays off the debts with the money it gains by selling the property. So your debts are gone, but so are all your assets! But Chapter 13 gives you a second chance. Here, you have to file for reorganization of debt. You have to file for bankruptcy with the court proposing to pay off the debt in full or in part. If the court rules in your favor, you get 3-5 years to pay off a percentage of your debts as may be prescribed by the court ruling. And there is also the advantage of retaining your property. Generally, the court rules that the debts should be paid off in installments in 3 years, but under special conditions, the court may allow a longer repayment period, but no more than 5 years. Over this period, the bankruptcy courts keep a close eye on your progress.

Chapter 13 Rules

Are you Eligible?: The Chapter 13 rules prescribe the conditions under which a person is eligible for filing bankruptcy under this chapter. A person can file for bankruptcy under Chapter 13 given his secured debts are less than $336,900 and secured debts are less than $1,010,650. A corporation or a partnership cannot file under Chapter 13. You also cannot file a petition under Chapter 13 if your prior bankruptcy petition was dismissed by the court due to willful absence on your part from the court proceedings in the preceding 180 days.

What do I Need?: As per Chapter 13 rules, you need a lot of paperwork to file your petition. To file a petition, you will need to prepare a dossier containing your bankruptcy forms, the names and addresses of your creditors, the amount of your debt, the source, amount and the frequency of income, your monthly living expenses and your property. You will need to get bankruptcy counseling from an approved credit counseling agency and a certificate given by the counseling agency saying that you have availed bankruptcy advice, along with the repayment plan prescribed by them.

What Happens Next?: When you file a petition for bankruptcy under Chapter 13, the court orders an immediate stay on your debts. No creditor can initiate or continue court proceedings against you. The installment payments start 30 days after you have filed your petition, irrespective of whether it has been approved or not. When the court approves your petition, it divides the repayment plan into 3 categories: Priority, Secured and Unsecured. The person who has filed for bankruptcy has to fully pay the amount under the Priority category. Under the Secured category, an asset of the bankrupt person will be seized if the amount is not paid. Under the unsecured category, the amount paid should at least be equal to the amount that would be realized, had the assets been liquidated.

Thus, we can say that the Chapter 13 rules give a bankrupt person a second chance to revive his financial position, without having to look at the grim prospect of asset liquidation. This chapter of the bankruptcy laws provides a lucrative situation where you can clear your debts, without selling your precious assets.