What Is Chaper 13 Bankruptcy?
The primary types of bankruptcy that private citizens should be aware of are Chapter 7 and Chapter 13, each named for the section of federal law describing them. The basic difference between the two is that a Chapter 7 bankruptcy, considered a total bankruptcy, stays on your credit report for 10 years. Chapter 13 is slightly more forgiving and could be described as a payment plan in which you pay back some of your debt. A Chapter 13 bankruptcy will stay on your record for seven years.
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Timeline
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A Chapter 13 bankruptcy involves a court-approved three- or five-year plan in which the debtor arranges to make monthly payments to discharge all or a part of his debt. To qualify, he must be a wage earner and submit a proposed payment plan to the court for approval. His level of income determines whether he will follow a three-year or a five-year plan. According to U.S. law, no plan can be approved for longer than five years.
Benefits
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There are a few genuine benefits to choosing Chapter 13 over Chapter 7. With the former, your house will generally not be in danger of foreclosure. In fact, the bankruptcy filing, when approved, stops the process of foreclosure and allows the delinquency to be made up over time. All collection efforts by any sort of organization or agency must stop under the terms of a Chapter 13 payment plan. This type of bankruptcy also simplifies the payment process by acting as a sort of consolidation loan in which payments are made to a single trustee, who then disburses the proceeds to the applicable creditors.
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Limits
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As long as an applicant's secured and unsecured debt levels do not exceed a certain amount, he can file for Chapter 13 bankruptcy. Presently, unsecured debt limits are capped at $360,475 and secured debt at $1,081,400. These caps are subject to periodic revision by the federal government. The final requirement for filing a Chapter 13 bankruptcy is that the applicant must have received consumer credit counseling at some point in the 180-day period preceding the commencement of the Chapter 13 process.
Process
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To initiate a Chapter 13 bankruptcy, the applicant files exhaustive personal financial details with the court, including a detailed description of income, living expenses, creditors and amounts owed. The act of filing generates an automatic stay against active collection efforts. A trustee will be appointed to administer the case as it proceeds through the court system. In consultation with the trustee, an attorney or both, the debtor also files a plan for repayment, which is discussed in a meeting between the trustee, interested creditors and the debtor. Once an agreement is reached, it is submitted to the judge for approval.
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References
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