Chapter 13 is often called a “reorganization” bankruptcy. Also available for business debt or consumer debt, Chapter 13 requires the debtor (and their attorney) to create a repayment plan that lasts either three or five years, depending on the debtor’s income. Chapter 13 is not available for debtors who debts exceeding certain thresholds.
Chapter 13 can be a great option for homeowners who have fallen behind on their mortgage payments, because they have the life of the plan to catch up any arrearage, bringing their mortgage current. There is also an opportunity to mediate with your mortgage lender to make your loan more affordable, and the success rate in Chapter 13 mediation far outpaces that of state foreclosure court-ordered mediation. You can also “strip” any unsecured liens from your home in a Chapter 13, meaning that the lien against your home is removed, and the debt is treated as an unsecured debt, like a credit card.
To create your plan we look at your monthly income, which must be reasonably stable, and your monthly expenses. Your monthly expenses are determined by using some of your actual monthly expenses (for things like mortgage or car payments), while others are based upon statistical averages (things like your food, utilities, and vehicle-ownership expenses). After subtracting your expenses from your income, what remains is called your “disposable monthly income.” Your plan will consume your disposable monthly income for its duration. You will pay your disposable monthly income to the Chapter 13 Trustee, who will collect the money and distribute it among your creditors according to the Plan. At the end of the plan, if all payments have been made as required, any unsecured liens may be stripped, and any unsecured debt that was not repaid under the plan is discharged.
