Chapter 13 is the section of the U.S. Bankruptcy Code under which individuals request court protection from creditors in order to establish a way to settle their debts within three to five years.
Chapter 13 is sometimes called a wage earner's plan; it buys time for the individual to figure out how to pay off all or part of his debts -- within three to five years -- under the scrutiny and approval of a federal bankruptcy court. Creditors cannot start or continue collection efforts once the Chapter 13 petition has been filed with the court. This differs from Chapter 7 bankruptcy protection, which sells your assets to pay off creditors, wipes out some debts, and allows a fresh start.
A law enacted in 2005 made it harder for people to file for Chapter 7 bankruptcy protection and forced more to use Chapter 13, which aims to get more of the debts repaid.
The federal government lists several advantages of Chapter 13 over Chapter 7, including:
- It gives individuals an opportunity to stave off foreclosure on their home. They still have to pay the mortgage, but their bankruptcy plan may give them time to make up delinquent payments.
- It allows individuals to reschedule secured debts and extend them over the life of the chapter 13 plan. This may lower payments.
- It may protect co-signers to your debt.
- Those in bankruptcy send payments to a court-appointed trustee, who pays the creditors. Individual have no direct contact with those to whom they owe money.
Chapter 13 also lets debtors keep "nonexempt" property that would be seized and sold under Chapter 7.