How Chapter 13 Bankruptcy Works

January 22nd, 2010 by Reed Allmand

When a debtor files Chapter 13 bankruptcy, he/she, along with the bankruptcy attorney and trustee will work together to determine how much the debtor will pay creditors and for how long.  A Chapter 13 bankruptcy can last anywhere from three to five years.  All creditors who filed claims in the bankruptcy court are lumped together and paid via the bankruptcy trustee.  They do not typically receive full payment.  For example: A debtor owing $100,000 may end up only paying $70,000 in Chapter 13 bankruptcy.  The debtor would pay the $70,000 by making reasonable monthly payments each month to the bankruptcy trustee. The monthly payment amount is determined by the debtor’s income and ability to pay.  Once the debtor completes the bankruptcy plan (by making the last payment) the balance of the debts are discharged by the bankruptcy court. In the case of the $100,000 debt, it would be $30,000 forgiven by the bankruptcy court.   Some important things a debtor should know about Chapter 13 bankruptcy:

1. Once you begin a Chapter 13 bankruptcy repayment plan you must finish it with a few exceptions:

1. You can no longer pay (job loss, illness etc.). In that case your Chapter 13 bankruptcy case is converted to a Chapter 7 bankruptcy.
2. You receive some type of windfall (inheritance, lottery, lawsuit settlement etc.) and you pay off the full balance to creditors.
3. Other specific exceptions which can be explored with your bankruptcy attorney.

1. If you voluntarily end your Chapter 13 bankruptcy plan, creditors have the right to resume collections against you.
2. Significant changes in your income must be reported to the bankruptcy trustee.

About Reed Allmand

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Allmand's vision is rooted in his own financially precarious childhood in Abilene "My father always had difficulty holding a job and supporting our family, so after my parents divorced when I was 12, my sister and I got jobs to help make ends meet," he recalls. "I remember what it felt like as a child to worry that our car would be repossessed or home foreclosed on."

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