What Is a Chapter 13?

What Is a Chapter 13?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

Chapter 13 is a type of bankruptcy that allows individuals burdened with heavy debt to restructure and reduce their financial obligations through a repayment plan approved by a bankruptcy court. Rather than wiping out debt completely as in Chapter 7 bankruptcy, Chapter 13 involves paying back creditors using your income over a period of three to five years. You can keep all your assets and property, and the remaining debt will be discharged at the end of the payment plan. It’s a favorable choice for individuals who have regular income and can pay back a portion of their debt over time.

Related Questions

1. What are the benefits of filing for Chapter 13 bankruptcy?

The primary benefits of Chapter 13 bankruptcy include the ability to prevent foreclosure on your home, make up missed car or mortgage payments, pay back taxes, and stop interest from accruing on your tax debt. It also provides breathing space to sort out your finances while you repay your debt over time.

2. What is the difference between Chapter 7 and Chapter 13 bankruptcy?

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Chapter 7 bankruptcy allows you to discharge most or all of your debt in a relatively short time, often within three to six months. However, you may have to liquidate certain assets to repay creditors. On the other hand, Chapter 13 bankruptcy helps you repay your debts over a three to five year period, without having to liquidate your assets.

3. Who is eligible to file for Chapter 13 bankruptcy?

Both individuals and small business owners can file for Chapter 13, as long as their unsecured debt (credit cards, medical bills, etc.) is under $394,725 and their secured debt (mortgages, car loans) is under $1,184,200 – these amounts may vary slightly as they are adjusted over time for inflation. Also, you must show that you have sufficient income to meet your repayment obligations.

4. Can I keep my property if I file for Chapter 13 bankruptcy?

Yes, under Chapter 13 bankruptcy you can maintain ownership of all your property. The repayment plan you create with the court’s approval allows you to make regular payments to your creditors while keeping your assets.

5. Will filing for Chapter 13 ruin my credit?

Filing for any bankruptcy will have a negative impact on your credit score, but it’s not permanent. Chapter 13 bankruptcy can stay on your credit report for up to seven years. Over time, as you pay down your debt and establish more positive credit behavior, the impact of the bankruptcy will lessen, and your score will gradually increase.