Chapter 13 Bankruptcy: Liquidation, Not Elimination

Chapter 13 bankruptcy is commonly referred to as liquidation. During a Chapter 13, a person is able to reorganize their debts rather than eliminate them entirely.

How it works:

When you file Chapter 13, you repay a portion of your debts through a payment plan. You give the money to a bankruptcy trustee appointed by the court, and the trustee pays the money to your creditors. This lasts typically 3-5 years.

The chapter 13 bankruptcy is not discharged until all payments have been made. Therefore, while in bankruptcy you are prohibited from getting any new loans, credit cards, or any other sort of financing. Also, a vast majority of people who file Chapter 13 never complete their repayment plans, which causes the bankruptcy to be discharged (thrown out of court).

Unlike Chapter 7, filing a Chapter 13 can stall a foreclosure, repossession, and help take care of back taxes. If you have assets, such as a house or vehicle, that you wish to keep, Chapter 13 bankruptcy is more feasible than Chapter 7 bankruptcy.

In order to file a Chapter 13 bankruptcy, you must have a stable, regular income with some type of disposable income. You must be able to prove your ability to stick with your court-appointed repayment plan, otherwise the Chapter 13 bankruptcy will not be approved.

After the bankruptcy has been filed, it can stay on your credit for up to 10 years, making it more difficult to apply for a mortgage, vehicle loan, or credit card. Your ability to obtain credit will improve as time passes. It's easier to get credit 4 years after a Chapter 13 bankruptcy has been discharged than it is 1 year after the discharge.

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