A Chapter 13 Bankruptcy differs from a Chapter 7 Bankruptcy is numerous ways. It is known as a “Wage-Earner Bankruptcy”. The primary purpose of a Chapter 13 Bankruptcy is to provide debtors with relief from debt by creating an organized and supervised repayment plan in which they can repay as much to creditors as possible and obtain relief from those amounts that cannot be paid. For debtors with regular income, a repayment plan of usually 3 or 5 years can be created to allow them to keep their property and repay whatever debt they can over the course of the plan. At the end of the plan, any unpaid debt is then discharged.
A Chapter 13 Bankruptcy can be particularly useful for debtors with arrears in property, as it allows time to repay the amounts owed while preventing any creditors from beginning or continuing with any collection actions, repossessions or foreclosures. This means a debtor can create a plan to pay back what is owed on their home over the course of years, which reduces the amount required for payment each month while also preventing the bank from foreclosing on the home until the delinquent mortgage amounts are cured. Additionally, plan payments are made directly to the Trustee, which means that debtors can avoid any direct contact with the creditors over the course of the plan.
A Chapter 13 Bankruptcy can also help you to pay off debts during the course of your plan that cannot be eliminated in a Chapter 7 Bankruptcy (i.e. taxes, back owed support orders, etc.). They cannot be eliminated, but they can be included in your plan and paid in full by the end of the plan.
Often the most beneficial aspect of a Chapter 13 Bankruptcy is the ability to eliminate junior mortgages. If you own a home, have more than one mortgage, and are “underwater” such that the value of your home is less than the amount owed, you may be eligible to “strip away” any junior mortgage liens. In this situation, a debtor asks the court to recognize that the junior liens are no longer secured debt since the value of the home is insufficient to cover the amounts, thus reclassifying such liens as unsecured debt. Once the court allows the reclassification, the junior liens are added to other unsecured debt (such as credit cards, etc.) and eliminated, or discharged, at the end of the plan with the other unsecured debt.
Although a Chapter 13 Bankruptcy has its benefits, it is a more time consuming and complicated proves than a Chapter 7 Bankruptcy, and generally requires debtors to use all disposable income to make plan payments, this can be difficult as it leaves debtors with very little excess funds, but beneficial because debtors can save property and/or eliminate most debt by the end of the plan.