Known as a type of reorganization bankruptcy, Chapter 13 requires adherence to a multi-year schedule of payments to creditors rather than erasing debt through liquidation as Chapter 7 bankruptcy does.
If your income is not below the median for your household size, if you want to protect certain assets (above and beyond essentials) from liquidation, or if you want to stop creditors from contacting you, this may be the route to take. Ultimately, the court decides whether an individual files under Chapter 7 or Chapter 13.
Chapter 13 bankruptcy assigns a trustee to monitor your financial progress as the process takes longer than Chapter 7. In general, Chapter 13 allows you to structure repayment of debts until you have paid an amount equal to your assets. Outstanding debt beyond that amount is generally discharged.
Under reforms enacted in 2005, more individuals are required to file Chapter 13 than Chapter 7, requiring greater amounts of unsecured debts, like credit card bills, to be repaid. The law also requires credit counseling and money management classes before and after a bankruptcy declaration. This reform act also allows states to set their own asset requirements, so a primary home may be protected from creditors in one state but not in others; home purchases and change of residency are also subject to review by a bankruptcy judge, who may determine that the asset will only be partially exempt from creditors in bankruptcy.
Chapter 13 Bankruptcy Steps
To begin the process of filing for Chapter 13, consult the clerk's office at the bankruptcy court located closest to you. Each of the U.S. District courts has at least one bankruptcy court, so there are 90 located across the country. The clerk's office provides guidelines and processes documents that are filed. After that, a trustee is assigned to oversee the process. Creditors are gathered for a meeting called "341" and the financial restructuring plan may commence after that.
History of Chapter 13 Bankruptcies
Some of the Western World's oldest texts mention debtors and how they should be treated. In ancient Greece, debtors and their families were subject to a period of slavery to repay creditors. England has had laws on its books concerned with "bankrupts" since the early 1500s, slowly reforming the penalties to allow a limited number of self-declared incidents (prior to the 1800s, creditors reported bankrupts rather than individuals self-reporting, seeking relief through the courts). In the mid-1800s England reformed corporate bankruptcy to shield investors, limiting their liability to the amount the individual had put into the company.
In the United States, individuals were first allowed to declare bankruptcy in the 1930s, when bankruptcy courts were created. The laws around bankruptcy were overhauled in 1978 by a decision of the Supreme Court which forced Congress to reorganize bankruptcy courts to conform with the Constitution's directives on the power of judges (enacted in 1984). The Bankruptcy Code was revamped in 2005 with the Abuse Prevention and Consumer Protection Act that emphasized creditor repayment under Chapter 13 rather than widespread individual use of Chapter 7 that allows a fresh start often without any repayment of debt.