U.S. Bankruptcy laws are designed to provide relief to individuals and businesses that are experiencing extreme financial difficulties.
Chapter 13 is commonly referred to as the wage earner plan. If a debtor (or husband and wife debtors) have any sort of income, from any source, he can file a petition for relief under Chapter 13 and repay his creditors, in part or in full, through a court-appointed trustee. The debtor must file a plan for repaying all or a part of his debt to creditors within 2 weeks of filing Bankruptcy. The creditors can accept or reject the plan, but the final decision as to approval of the plan is up to the Judge under the Bankruptcy laws.
Within a month of filing Bankruptcy, the debtor must make monthly payments to his court-appointed trustee. Once a plan of repayment is approved by the Judge, the trustee pays this money to the creditors in accordance with the repayment plan. These payments to the trustee normally continue for 3 to 5 years. A Chapter 13 filing may allow the debtor to stop foreclosure by bringing all past due payments and penalties current by making payments into the Chapter 13 Plan. Most mortgage payments must then continue to the mortgage company or bank.
If the debtor follows the repayment plan by making all payments called for by the Plan, the debtor receives a discharge order wherein the bankruptcy Judge formally forgives or discharges the debtor on all debts that can be discharged, except certain types of debt such as: alimony, support, recent taxes, student loans or debts obtained by fraud and some others. A discharge does not ordinarily affect mortgages, car loans, or most other liens.
Filing for bankruptcy relief does damage credit ratings; it can be reported by credit bureaus for 10 years. Some creditors are more likely to give credit to those individuals who file under Chapter 13 rather than Chapter 7. While individuals can represent themselves, Bankruptcy can be complicated. There are exceptions to much of what is set forth here. Anyone considering bankruptcy is urged to consult and employ a lawyer.