People dealing with high levels of debt and facing aggressive collection efforts may decide to take legal action. They can file for personal bankruptcy to eliminate some of their financial stress. During bankruptcy proceedings, filers receive an automatic stay that prevents continued collection activity until they resolve their financial matters.
Depending on the type of bankruptcy that they file, they may become eligible for a discharge of their unsecured debts after several months or possibly several years. Chapter 13 bankruptcy takes longer to complete than Chapter 7 bankruptcy because there is a repayment plan involved. Filers must make structured payments to their creditors to pay down what they owe before they can discharge what remains.
Who determines the details of a Chapter 13 repayment plan?
The filer proposes the plan at a meeting
Typically, the party filing for bankruptcy and the attorney representing them propose the details of a Chapter 13 repayment plan. The filer provides financial disclosure that explores their income and various financial obligations while proposing a specific repayment schedule.
They present this plan at a meeting of creditors attended by the court-appointed trustee as well. During that meeting, interested parties can ask questions and challenge the proposed plan. It may be necessary to make certain modifications to the plan to secure approval.
Typically, the filer has to allocate the vast majority of their disposable income toward their payments. The amount that they pay every month and even the duration of the repayment plan can be different from one case to the next. Some people make payments for as little as three years in a Chapter 13 bankruptcy. Others continue making payments for up to five years.
The filer makes one monthly payment to the courts, and the trustee distributes those funds to creditors in accordance with the plan. So long as the filer follows through on their obligations and makes all of the monthly payments as scheduled, the remaining balances of certain debts are eligible for discharge at the end of the repayment plan.
Understanding what happens during a Chapter 13 bankruptcy can help people prepare themselves for the various challenges ahead. A successful Chapter 13 bankruptcy can reduce an individual’s overall debt and help them avoid collection activity that could have significant long-term consequences.
