Chapter 13 bankruptcy allows debtors to keep property, with some exceptions
For people who are on the brink of filing bankruptcy, one of the biggest concerns is how much of their property they will be able to keep. In a Chapter 7 bankruptcy, most exemptions cover homes, cars and personal belongings, but any non-exempt property must be sold to pay creditors.
The approach is different with a Chapter 13 bankruptcy. Debtors agree to a court-ordered repayment plan based on their income and expenses. Whatever disposable income they have left each month is used to pay creditors for three to five years. In exchange, debtors are allowed to keep their property and belongings, and the creditors cannot seize those assets.
However, the court will not include debt payments on non-essential or luxury items in the repayment plan. If an individual cannot keep up with the monthly installments, the non-essential goods may have to be sold or returned to the creditor, according to the National Association of Chapter 13 Trustees. In addition, some non-exempt items may be kept by the debtor as long as the creditors are paid for their value.
Since a Chapter 13 action takes several years, the court recognizes that an individual's circumstances may change before a repayment plan is completed - jobs could be lost, medical problems may occur and other circumstances may arise that prevent Chapter 13 payments from being made. In such cases, there are options built into the system to aid debtors who no longer have the money to make regular payments.
"One of the strengths of Chapter 13 is its flexibility. While requiring the debtor to make payments from future income, the bankruptcy code recognizes that things change," writes California lawyer Cathy Moran on the BankruptcyLawNetwork.com. "Section 1329 provides that payments to the Chapter 13 plan may be increased or, more often, decreased."
There are several options available under those circumstances. First, the individual can ask the court to modify the repayment plan. For example, a person may request suspending repayments for a few months until the debtor is able to make them again. If more help is necessary, a debtor can apply for a hardship discharge, which eliminates all debts except those that cannot be discharged in a Chapter 7 action, such as mortgage payments. Depending on their financial situation, debtors may also decide to convert to a Chapter 7 bankruptcy, although Moran states that they may have to relinquish some of their property in the process.
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