In Chapter 13 bankruptcy, you propose a repayment plan to your creditors, and it generally lasts three to five years. It offers to pay all or part of your debt from any future income you earn. You can use Chapter 13 to make up missed car payments, pay back taxes you owe, prevent a bank from foreclosing on your house, keep non-exempt property that you deem valuable, stop interest from gaining on your tax debt, and much more. When you follow the terms of your agreement to repay your debts, all of your remaining dischargeable debts would be released at the end of the repayment period. The monetary amount assigned to creditors under a Chapter 13 bankruptcy must be equal to the amount they would have received if a Chapter 7 bankruptcy had been filed. To file Chapter 13 bankruptcy, you must have a “regular source of income” and disposable income to apply towards your repayments.
Normally, a chapter 13 bankruptcy is used when you want to keep secured assets, such as a car or house, where you have more equity in the secured assets that you can protect by using your bankruptcy exemptions. It’s a reorganization of the debts you owe your creditors that are not non-dischargeable debts.
A Chapter 13 bankruptcy allows you to make up your overdue payments over time and to reinstate your original repayment agreement. It may also be a better option when you have a valuable non-exempt property that you wish to keep. To keep a non-exempt property, you must pay the creditor for the value of the property.
An exemption limit would apply to any equity you have in the property. Equity is simply a difference between the value of the property and what you owe on it. For example, if you have a truck valued at $10,000 with a loan of $8,500, the truck only contains equity of $1,500. When you have a property that is held by a loan, the equity you own in that property is covered by your exemptions. That is if you are up-to-date on your payments. Also, if you choose to keep making your normal payments on the loan, you can keep the property throughout and after your bankruptcy term is complete. If the equity is not covered by your exemptions, your creditor may choose to sell off that asset and then distribute the money resulting from the sale. In this case, you would be entitled to the value of your exemption in the sold-off asset as a cash payment. Current bankruptcy laws allow a married couple filing together to each claim a full set of exemptions, meaning more property can be protected.
The non-dischargeable debts you cannot erase in bankruptcy include debts for personal injury/death caused by DWI/DUI, back child support, alimony, debts related to family support, student loans, income tax debts within the last three years as well as any other tax debts, penalties for traffic tickets, criminal restitution, and any debts you forget to list in your bankruptcy papers, unless you inform the creditor of your bankruptcy case. Other than those non-dischargeable debts, everything else included in your bankruptcy case will be discharged at the end of your agreed upon bankruptcy period.