Filing for Chapter 13 personal bankruptcy is called “debt reorganization.” Under Chapter 13 you will be required to pay back a portion of your debt according to your ability to pay over a 3-5 year monthly payment plan.

The most common reasons for filing Chapter 13 bankruptcy instead of the simpler, shorter Chapter 7 bankruptcy are: being delinquent on your mortgage; being delinquent on paying your taxes; or wanting to hold on to assets you would be forced to surrender under Chapter 7.

If you file Chapter 13 bankruptcy your mortgage lender is required to accept your repayment plan. You cannot be forced into foreclosure. However, be aware that more than 50 percent of all Chapter 13 filers fail to repay their debts. In that case the Chapter 13 trustee dismisses the case and most filers convert to a Chapter 7 bankruptcy and lose their home anyway.

Chapter 13 gives you the opportunity to work out repayment schedules for your creditors and protects your assets from being seized by creditors. You are eligible to file for Chapter 13 bankruptcy if:

• you live or maintain property in the U.S.
• you have a steady income
• you have adequate disposable income to repay scheduled debts
• if your secured debts don’t exceed $871,550 and your unsecured debts don’t exceed $290,225 (debt limits vary yearly – these are for 2004)

One reason that some people choose Chapter 13 over Chapter 7 bankruptcy is because under Chapter 13 you are allowed to keep ALL your assets, not just non-exempt assets, as under Chapter 7. However, in exchange for being allowed to keep all your “stuff,” you are required to repay your creditors a MINIMUM of at least half of what they would have received if you had filed under Chapter 7. That amount can vary by location.

Debts that MUST be paid back in full and cannot be renegotiated include:

• Child support
• Alimony
• Back taxes (federal, state and local)
• Mortgage
• Student loans

You will pay back your debts to a Chapter 13 court-appointed trustee who will then use the money to repay your creditors. You MUST keep current on your debt payments according to the repayment schedule you have created with the court. Once you have repaid your agreed upon repayment plan, your debt is officially discharged, or cancelled. Chapter 13 bankruptcy remains on your credit report for seven to ten years.

If you do not keep current on your debt repayment there are a few options:

1. Plan modification. You may be able to work with the bankruptcy court to modify your initial plan as long as you agree to still pay your creditors the amount agreed up in the initial repayment plan.
2. Request a hardship discharge. You may qualify for a hardship discharge if circumstances beyond your control (such as the death of a spouse or loss of a job) make it impossible to stay current on your repayment plan. If approved for a hardship discharge your debts will be discharged (forgiven) as long as your unsecured creditors receive what they would have received under Chapter 7.
3. Convert to a Chapter 7. You have the right to convert to a Chapter 7 bankruptcy filing at any time. However, you will have to surrender all your nonexempt assets that you were probably hoping to hold on to, including your house. All your unsecured debts will be discharged immediately and you will no longer have to make repayment plan payments.
4. Ask for your case to be dismissed. This effectively cancels the bankruptcy petition and puts you back in the position of working with your creditors without court protection. This may be desirable if the only other option is converting to a Chapter 7 and losing your nonexempt assets such as your house.