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How does a Chapter 13 repayment plan work?

There are numerous noteworthy distinctions between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy. There are different income limitations and rules about what happens to your property and financial accounts.

One of the most significant differences between these two popular forms of bankruptcy is the repayment plan. Compared with the quick and efficient Chapter 7 filing, a Chapter 13 bankruptcy takes much longer. The person filing must make payments for years before the courts will discharge unsecured debts.

People with more property don’t have to worry about losing their assets in a Chapter 13 filing, and individuals with higher incomes can qualify for Chapter 13 bankruptcy even if they don’t pass the means test for Chapter 7. The repayment plan required in a Chapter 13 filing is one reason why the courts are more generous with the people who file. How does that repayment plan work?

It starts with a creditor meeting

When you file your initial bankruptcy paperwork, the courts will appoint the trustee to oversee the process. That trustee will arrange a meeting with you and representatives from the creditors potentially affected by your bankruptcy.

During that meeting, the trustee and creditors will have access to your financial records. They will have the opportunity to ask questions and make suggestions about the repayment plan. Ultimately, the trustee will expect that you commit almost all of your disposable income toward repayment of unsecured creditors prior to your discharge. They will decide how much each creditor gets from the money you have available.

You’ll make one monthly payment directly to the courts, and the trustee will send portions of that payment to various creditors. After somewhere between three and five years, you will complete the plan, at which time the court will discharge whatever you still owe on those debts.

What happens if you can’t make a payment?

Someone struggling enough financially that they need to file for Chapter 13 bankruptcy may worry about having little flexibility in their monthly budget. However, the good news is that if your income decreases or your financial circumstances change, you may be able to amend your repayment plan accordingly.

Learning more about how Chapter 13 bankruptcy works can help you determine if it is the right solution for your financial circumstances.