Chapter 13 bankruptcy operates a bit differently than Chapter 7. It’s designed for people who still have a stable income, so it’s often referred to as a wage earner’s plan. Under Chapter 13, you create a long-term repayment plan to address your debt, which may last for the next 3 to 5 years.
One of the benefits of Chapter 13 is that it doesn’t require asset liquidation. With Chapter 7, many assets are exempt from the process, but those that aren’t must be sold off to pay down the debt. Since this doesn’t happen with Chapter 13, people can generally keep everything they own.
Spreading out the financial obligation
So, how does this provide financial relief? It does so by spreading the obligation out over an extended period of time.
Say that someone has a mortgage, a car loan, credit card debt and medical bills. They owe payments in all of these areas every month and simply can’t afford to address all of the debt. As they miss payments, the debt begins to compound, and their situation gets worse.
But that person still has a job with a stable income. If they take all of the debt they owe immediately and spread it out over the next five years, the monthly payment may be very affordable within their budget. In this sense, they do get financial relief, even though they are still obligated to make ongoing payments and eventually pay off their debt.
The type of bankruptcy a person files for depends on many different factors and may be subject to a means test. It’s important for people to understand all of the options available and the legal steps they need to take at this time.