There are two main reasons why debtors file Chapter 13 bankruptcy instead of Chapter 7 bankruptcy. First, they are ineligible for Chapter 7 discharge because they have too much disposable income or a prior discharge. Second, they need to file Chapter 13 bankruptcy in order to protect secured property from repossession or foreclosure.
Debtors in Chapter 13 bankruptcy cases submit a reorganization plan to the court. The plan proposes how the debtor would like to repay their debts. Creditors are treated differently depending on their claim type. Secured creditors can be paid in the plan, directly by the debtor, or the debtor can choose to surrender the collateral and discharge the debt. Priority creditors, like child support and income taxes, are paid in full as part of the Chapter 13 plan. Unsecured creditors may or may not get paid in full or in part depending on the debtor's disposable income. Essentially unsecured creditors get paid in Chapter 13 bankruptcy if the debtor can afford to pay them.
Chapter 13 bankruptcy cases generally last three to five years. They can end sooner if the debtor pays off all of their allowed claims. At the end of the bankruptcy case the debtor should be debt free except for secured claims that are being paid for outside of the reorganization plan and nondischargeable debts. These may include income tax that was incurred after the petition was filed and student loans.
Chapter 13 bankruptcy debtors are also protected by the automatic stay. This is a great tool for stopping vehicle repossession and foreclosure of a home, and allowing the debtor an opportunity to get caught up on their payments and keep their secured property. If in north Texas, call a Frisco Bankruptcy Attorney for more information.