What is Chapter 13 & How Does it Work?
Chapter 13 bankruptcy is an interest-free repayment plan on your debts that you can actually afford, one that you can pay off over time (usually 3 to 5 years). It is overseen by the Bankruptcy Court to make sure everyone plays by the rules, and it allows you to pay your creditors back on terms that are favorable to you, without any interest. This is different from a Chapter 7 filing, which simply liquidates your assets in order to pay back creditors. Unlike Chapter 7, Chapter 13 bankruptcy allows you to keep your home or your car, even if you have been behind on payments.
Furthermore, all of your creditors are paid with a single monthly payment to the Bankruptcy Trustee rather than multiple payments to different creditors due at different times during the month. This payment satisfies all your debt obligations, rather than just one creditor being paid. Chapter 13 also doesn’t negatively affect your credit the way a Chapter 7 would.
PAY IRS TAXES
Chapter 13 bankruptcy is often used to pay IRS taxes that would not be eliminated in a Chapter 7. Under a Chapter 13 payment plan, the interest and penalties on these taxes generally stops. You are allowed to pay the IRS with a monthly payment that you can afford to make. The IRS cannot garnish your bank account, attach your wages, call you at work, or put a lien on your property. But remember, if the taxes are more than 3 years past due, we may be able to totally eliminate the tax by filing bankruptcy.
Chapter 13 bankruptcy establishes a reasonable monthly payment for the debtor to pay to the bankruptcy trustee. The trustee then distributes this payment to the debtor’s creditors.
Chapter 13 bankruptcy generally only requires debtors to repay a small portion of their total debt. YOU GENERALLY DO NOT HAVE TO PAY ALL OF YOUR DEBT BACK WHEN YOU FILE A CHAPTER 13 BANKRUPTCY! THIS IS WHY FILING A CHAPTER 13 BANKRUPTCY IS MUCH MORE BENEFICIAL THAN SIMPLY CONSOLIDATING YOUR DEBTS THROUGH A CREDIT COUNSELING AGENCY.