Under a Chapter 13 Bankruptcy, a debtor proposes a 3-5 year repayment plan to the creditors offering to pay off all or part of the debts from the debtor’s future income. They can use Chapter 13 to prevent a house foreclosure; make up missed car or mortgage payments; pay back taxes; stop interest from accruing on your tax debt (local, State of Texas, or Federal); keep valuable non-exempt property (see Texas Exemptions); and more. If the debtor can stick to the terms of your repayment agreement, all the remaining dischargeable debt will be released at the end of the plan (typically three to five years). The amount to be repaid is determined by several factors including the debtor’s disposable income as is usually determined as part of the Texas Means Test. In addition, the total amount paid to creditors under the Chapter 13 plan must also be at least as much as creditors would have received if the debtor filed a Chapter 7 bankruptcy. To file Chapter 13 bankruptcy you must have a “regular source of income” and have some disposable income to apply towards your Chapter 13 payment plan.
Chapter 13 bankruptcy is generally used by debtors who want to keep secured assets, such as a home or car, when they have more equity in the secured assets than they can protect with their Texas bankruptcy exemptions. Chapter 13 bankruptcy is a reorganization whereas Chapter 7 bankruptcy is a liquidation.
A chapter 13 bankruptcy allows them to make up their overdue payments over time and to reinstate the original agreement. Where a debtor has valuable nonexempt property and wants to keep it, a chapter 13 may be a better option. However, for the vast majority of individuals who simply want to eliminate their heavy debt burden without paying any of it back, Chapter 7 provides the most attractive choice.
Advantages to a Texas Chapter 13 Wage Earner plan:
- If the payment plan is affordable, debtors can keep all their property, exempt and non-exempt.
- While debts that are not cancelable in a Chapter 7 discharge they can be reduced under a Chapter 13 payment plan.
- Immediate protection against creditor’s collection efforts and wage garnishment.
- More debts are considered to be dischargeable (including debts incurred on the basis of fraud and credit card charges for luxury items immediately prior to filing).
- If the Chapter 13 plan provides for full payment, any co-signers are immune from the creditor’s efforts.
- Protection against foreclosure on a home by the lender as long as the terms of the plan are met.
- More time to pay debts that can’t be discharged by either chapter (like taxes or back child support).
- File a Chapter 13 at any time.
- File repeatedly.
- Separate your creditors by class where different classes of creditors receive different percentages of payment. This enables debtor’s to treat debts where there is a co-debtor involved on a different basis than debts incurred on their own.
Disadvantages to a Texas Chapter 13 Wage Earner plan:
- Create a payment plan where you use your post bankruptcy income. This ties up cash over the Chapter 13 plan period.
- Legal fees are higher since a Chapter 13 filing is more complex.
- The plan and therefore your debt will last for 3 to 5 years.
- Stockbrokers, and commodity brokers, and other certain license holders cannot file a Chapter 13 bankruptcy petition.