What Is Chapter 13?

Bankruptcy law provides two basic forms of relief: (1) liquidation and (2) rehabilitation or reorganization. Most bankruptcies filed in the United States involve liquidation, which is governed by Chapter 7 of the Bankruptcy Code. A reorganization or rehabilitation bankruptcy under Chapter 11 (business) or 13 (consumer) of the Bankruptcy Code is, however, the option often preferred by the courts. In a reorganization bankruptcy, creditors may have better opportunity to recoup what they are owed.

Chapter 13 has certain advantages over Chapter 7 in consumer bankruptcies. The biggest advantage for many people is that Chapter 13 allows individuals the opportunity to keep their homes and avoid foreclosure. Chapter 13 also permits individuals to reschedule secured debts and extend them over the life of the bankruptcy plan. In addition, Chapter 13 allows the debtor to discharge more types of debts than Chapter 7 does.

Further, under Chapter 7, the court may order that the consumer’s nonexempt assets be sold, whereas under Chapter 13 the debtor may be able to retain more of his or her assets. A consumer’s choice between Chapter 7 and Chapter 13 is not necessarily the last word; once bankruptcy proceedings have begun, a case may be converted to a different chapter. Once converted, however, in some situations and some jurisdictions the court may not allow the case to be converted back again.

A consumer may choose bankruptcy under Chapter 13 if he or she has a stable income, believes the financial crisis is temporary and wants to repay at least some debt. To be eligible for Chapter 13, however, the debtor must have less than a certain amount of debt as periodically determined by the Judicial Conference of the United States. For example, as of April 1, 2010, the upper debt limits were $360,475 in unsecured debt and $1,081,400 in secured debt.

Chapter 13 generally applies to individual consumers with smaller debts. Corporations and partnerships cannot file under Chapter 13, but self-employed individuals and those who own unincorporated businesses are eligible for Chapter 13. If the debtor is an individual with extremely large debts in excess of the Chapter 13 dollar limits or is a corporation, Chapter 11 reorganization is generally available. Farmers can file under Chapter 12, which provides for reorganization, and municipalities may file for Chapter 9 reorganization.

Experienced bankruptcy attorneys have the knowledge to help clients get out from under formidable debt and emerge as productive citizens, and can advise debtors about whether Chapter 13 is the right course of action given their particular circumstances. Contact our firm to schedule an appointment with an experienced bankruptcy attorney.

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