Chapter 13 fits some debtors' financial goals better than Chapter 7
For people with a stable income and a mounting pile of debts, filing under Chapter 13 in U.S. Bankruptcy Court is far more advantageous than the liquidation process of Chapter 7.
This type of bankruptcy, which allows individuals to catch up on back payments for secured property and non-dischargeable bills, also extends court protection to anyone who is a co-signer on the debts listed in the bankruptcy estate. Debtors enter a court-approved repayment plan over three to five years, and are granted an automatic stay that prevents creditor collections and lawsuits until it is completed.
According to United States Courts, Chapter 13 also provides protection for third parties who become liable with the debtor on consumer accounts or loans that they co-sign. That protection continues for the life of the court action and once a discharge takes place.
For filers who are behind in their payments on student loans, back taxes and child support and alimony payments - all priority debts that must be paid in full - the length of a Chapter 13 case provides a good chance to become current on those accounts. Secured debts, such as mortgage and car payments, must include the regular monthly installment, plus a specified amount to bring back payments up-to-date by the time the case ends.
Creditors for unsecured debts such as credit card and medical bills must accept reduced amounts set by the bankruptcy court during this period. Payments on unsecured debts can range widely, and creditors often receive from 10 to 40 percent of the total they are owed. Any unpaid balances that remain when the bankruptcy concludes are discharged.
Frequently, debtors who file Chapter 13 do so because they don't qualify for Chapter 7, in which all non-exempt property must be sold to pay creditors. Those who have completed a Chapter 7 bankruptcy are required to wait eight years to file a similar liquidation case, but are allowed to seek relief under Chapter 13 after only four years.
Perhaps most important to many people who file a Chapter 13 case is the ability to stop a foreclosure on their home or repossession of their vehicle. A mortgage company must accept the court's plan for back payments without going forward with a foreclosure. Car repossession is stopped in the same way, as the past due and future payments are folded into the repayment plan.
In addition, the filing stops wage garnishment and tax liens that may have begun before a debtor filed bankruptcy.
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