Chapter 13 Bankruptcy Rules: What You Should Know Before Filing

By: Jane C. Smith | LRL Editor

In contrast to Chapter 7 bankruptcy, Chapter 13 bankruptcy rules provide a less extreme option for consumers who do not have the capacity to pay for all their debts. Both debtor and creditor have advantages under Chapter 13. Debtors avoid the stigma of Chapter 7 liquidation while creditors may recover more debts than they would be able to under the latter.

Chapter 13 bankruptcy rules allow repayment of debts owed by natural persons. If all parties in a bankruptcy arrangement reach an agreement on the terms, the court supervises the repayment plan. A trustee ensures that payments are made to the creditors. Only the court appoints the trustee.

Payments are made directly to the trustee and not to the creditor. Depending on the terms agreed upon, repayment can be done in a weekly, monthly or bimonthly format. It is the trustee's obligation to evenly distribute the payment to the various creditors. More often than not, the total amount of debt owed to all creditors has been already reduced or restructured to help the debtor pay all of his or her obligations.

It is the trustee's responsibility to assess the real financial capability of the person filing for bankruptcy. This is important in the restructuring of the total amount of debt and the repayment schedule to be set. The trustee analyzes the debtor's monthly income as compared to monthly expense to determine the purchasing power or the amount the debtor would be able to pay to all creditors.

Chapter 13 bankruptcy rules require that the person or business adhere to the repayment schedule set by the court. However, this is only suitable for individuals with stable and regular income. If you are a freelancer or if your job is seasonal in nature - meaning your have peak and off peak seasons - then Chapter 13 is not the form you should consider. The amount of asset s a debtor has is not relevant. Rather, the question is whether the debtor has stable, regular income such as salary, wages, social security, etc.

The most critical step regarding Chapter 13 bankruptcy rules is making sure you meet all your payments on time according to the set repayment schedule. If you do not abide by it, the case and the entire court record can possibly be thrown out. If this happens, then the creditor has the full right to demand full payment for the debts still owed.

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