If you are overwhelmed with debt and simply need some time to catch your breath and restructure your repayment to your creditors, filing for Chapter 13 bankruptcy might be the answer to your financial issues There are also liabilities involved, and unlike Chapter 7 bankruptcy, you still need to make payments to your creditors for a period of wither three or five years. 

However, also unlike Chapter 7 bankruptcy, you get to keep your property rather than surrender it for liquidation to pay creditors. 

Here is a brief explanation of the basics of Chapter 13 bankruptcy, along with its assets and liabilities.

What is Chapter 13 bankruptcy protection?

This is a petition filed in federal Bankruptcy Court which allows a debtor to repay creditors according to the debtor's disposable income. Depending on the individual's income in relation to the average income in their home state, they must make payments for a period of either three or five years, with the five year plan mandated for those with higher incomes.

Disposable income is defined as the amount left over each month after expenses for basic necessities are paid. The bankruptcy courts in each state determine the limits an individual can claim for necessary expenses each month, which can vary based on the cost of living in individual states.

Any disposable income must be paid to a court trustee, who will distribute the money among creditors. Secured debts, such as those for mortgages or vehicles, must be paid in full. The debtor must either make regular timely payments to secured creditors or give up the property. These payments are separate from the disposable income distribution payments.

The benefits of Chapter 13 bankruptcy

If a debtor has little disposable income, they may need to pay only a minimal amount in monthly payments, Any debt left over after the repayment period is forgiven.

When a Chapter 13 bankruptcy petition is filed in court, an "automatic stay" goes into effect, freezing all collection efforts and halting any court filings by creditors, such as judgments, vehicle repossessions, and home foreclosures.

Debtors can make binding arrangements through the court to pay any arrears in mortgage or vehicle payments to avoid repossessions or foreclosure after the bankruptcy petition has been approved.

The liabilities of filing for Chapter 13 bankruptcy

This type of bankruptcy is called the "wage earner's plan", and this means that the debtor must have sufficient income to meet at least their basic monthly expenses. If not, they will need to file for Chapter 7 bankruptcy and relinquish some of their property.

It may be difficult for some individuals to complete the entire plan, because the repayment plan demands all of the disposable income, which can significantly hinder the petitioner's lifestyle for the entire length of the repayment period.

Filing for Chapter 13 bankruptcy can severely damage your credit score. However, if you need bankruptcy protection, it's likely that your credit rating has already taken a significant hit. Bankruptcy will at least allow the debtor to relieve the burden of debt that is weighing them down each  day and keeping them awake each night, and that's worth more than any credit score.

Speak with a bankruptcy lawyer to learn more.