Generally, individuals file either a Chapter 7 or a Chapter 13 bankruptcy. But, for the purposes of this post, we’re going to discuss the advantages of a Chapter 13 bankruptcy. The U.S. Bankruptcy Courts refer to Chapter 13 as the “wage earner’s plan.” In other words, it’s the chapter that people with regular incomes tend to file.
With a Chapter 13, debtors with a regular source of income; for example, from a regular job, can develop a plan to pay of all or a portion of their debts. With a Chapter 13, debtors, with the assistance of a bankruptcy attorney, draft a repayment plan that involves monthly installments to creditors and they propose the plan to the bankruptcy court.
3 vs. 5-Year Repayment Plans
Chapter 13 repayment plans are either established for three or five years. If the debtor’s currently monthly income is less than Pennsylvania’s median, the debtor’s repayment plan will be set for three years. On the other hand, if the debtor’s median income is more than Pennsylvania’s median, then the debtor’s repayment plan will last five years.
Under NO circumstances is a debtor’s repayment plan ever set for longer than five years. During the three or five-year repayment plan, creditors are strictly forbidden from starting or continuing any collection activities against the debtor.
Advantages of a Chapter 13 include:
- Unlike a Chapter 7, a Chapter 13 can help debtors save their homes from foreclosure. With a Chapter 13, homeowners can cure their delinquent mortgage payments over the life of the repayment plan.
- Debtors can reschedule secured debts, such as auto loans, and extend them over the course of their repayment plan.
- Chapter 13 can protect third parties who co-signed on a consumer debt with the bankruptcy filer.
- The bankruptcy filer makes monthly payments to the bankruptcy trustee, who distributes the funds to the creditors. This means the debtor does not have direct contact with his or her creditors while protected under the Chapter 13.