There are two types of bankruptcies; liquidation and reorganization. Liquidation cases are discussed under the tab Chapter 7. Reorganization bankruptcies are cases where you partially or fully repay your debts. Consumers who wish to reorganize typically use Chapter 13 bankruptcy. Family farmers use Chapter 12, corporations or wealthy people use Chapter 11, foreign citizens or corporations can use Chapter 15, and cities and municipalities use Chapter 9. The names come from the chapters of the federal Bankruptcy Code. I will restrict my discussion to the most common type of reorganization, Chapter 13.
Chapter 13 bankruptcy lets you rearrange your financial affairs and repay a portion of your debts. You repay your debts through a "Chapter 13 plan". Under a typical plan, you make periodic payments to the Chapter 13 trustee for three to five years. The bankruptcy trustee distributes the money to your creditors.
Chapter 13 bankruptcy isn't for everyone. If your total debt burden is too high or your income is too low or irregular, you may not be eligible. You may be better off handling your debt problems in another way such as filing for Chapter 7 bankruptcy, seeking help from a nonprofit consumer counseling group, or negotiating with your creditors on your own. Chapter 13 is expensive, intrusive, tougher on your credit rating than Chapter 7, and a stressful way to live. If you have the right circumstances, however (see below for examples) Chapter 13 may be perfect for you.
For you to qualify for Chapter 13 bankruptcy, you must have "stable and regular" income. Your income must be high enough so that after you pay for your basic needs, you are likely to have money left over to make periodic (usually monthly) payments to the Chapter 13 trustee for three to five years. The total amount you must pay will depend on how much you owe, the type of debts you have, and your household income.
There are many reasons why people choose Chapter 13 bankruptcy. Generally, you may be a good candidate for Chapter 13 bankruptcy if you are in any of the following situations:
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You are behind on your mortgage or auto loan, and want to make up the missed payments over time and reinstate the original agreement.
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You have a tax debt that cannot be eliminated (discharged) in Chapter 7 bankruptcy, but can be paid off over time in a Chapter 13 payment plan.
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You owe more on a car or mobile home debt than the collateral is worth. In a Chapter 13 you may be able to pay the creditor the value of the collateral (as opposed to the total balance due) and get the title released to you during the bankruptcy. This is not always possible.
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You have a sincere desire to repay your debts, but you need the protection of the bankruptcy court to do so.
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You need help repaying your debts now, but need to leave open the option of filing for Chapter 7 bankruptcy in the future.
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Your income is above the state median level, so that you may not be able to file a Chapter 7 case under the new law.