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What is Chapter 13 Bankruptcy and Who May File?

Updated: Feb 25

What is Chapter 13 Bankruptcy?

While Chapter 7 is a liquidation bankruptcy, Chapter 13 is a reorganization bankruptcy. It is best for individuals with regular income and property they wish to keep. In a chapter 13, the debtor must file and confirm a chapter 13 repayment plan to repay some of his/her debts (based on disposable income) from 3 to 5 years. Once debts are repaid over the plan term, the debtor will obtain a discharge. often, unsecured debts (medical bills, credit cards) get paid pennies on the dollar.

A major benefit of a chapter 13 is that it allows a debtor to “cram down” most loans. For example, the balance owed on a car loan can be reduced so that it is no more than the value of the vehicle it secures, and interest rates can be reduced to a market rate. First mortgages against the debtor’s primary residence cannot be modified.

Only individuals with regular income can file chapter 13, provided such individuals have less than $419,275 in unsecured debt (e.g., credit cards, medical bills etc.) and $1,257,850 in secured debt (e.g., mortgages, car loans). Business entities cannot under chapter 13. Since a sole proprietor is not a separate legal entity apart from the individual owner, a sole proprietor may file under chapter 13 and continue to operate his/her business. These figures are adjusted periodically based on inflation statistics.

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