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A Chapter 13 bankruptcy is filed by individuals who are either capable of paying back a portion of his or her debt or need to file it to protect assets that cannot be protected in a Chapter 7. It is also filed when a debtor is about to lose his home. Many reasons can lead a debtor to file a Chapter 13 bankruptcy.
Every Chapter 13 bankruptcy involves a payment plan that the debtor must draft and file. The Plan usually last between 36 and 60 months. The Bankruptcy Code requires a plan to be filed in good faith and be feasible. The good faith requirement says that a debtor must commit the household disposable income to pay back debts. Disposable income roughly means the debtor’s net income after deducting necessary and reasonable living expenses and secured debt payments. Some deductions are limited by law and others by reason. The Court requires debtors to commit all money not spent on food, clothing, shelter, etc. toward the payment plan. Creditors can object to a Plan that doesn’t commit enough money.
As mentioned above, the Plan must also be feasible. This means that the debtor must demonstrate that he or she can afford the Plan. If the payments are too large that it will cause the debtor to fail, the Court will not approve the Plan.
If the Plan is both feasible and filed in good faith, the bankruptcy judge will approve it. This approval is also called "confirmation" and it is required. A bankruptcy case can be dismissed if a plan cannot be confirmed.
There is a great deal of legal engineering when it comes to drafting a Plan where the payments are not too high (unfeasible) and not too small (bad faith). There may be some litigation to get the Plan confirmed when creditors object. A Chapter 13 is much more complicated than a Chapter 7 due to the Plan, and it should be handled with help from an attorney.
While in a Chapter 13, the debtor is protected by the Bankruptcy Court from collection actions. The law prohibits creditors from taking actions to collect debt without the Court’s permission. This include repossessing cars and foreclosing on real estate. For this reason, a Chapter 13 is an attractive option that can help save a home.