Chapter 13

People in receipt of a Notice of Trustee Sale, Notice of Default, or in need of protecting assets in danger of repossession often consider Chapter 13 bankruptcy. Commonly known as “individual debt adjustment”, “individual debt consolidation”, or “repayment plan”. A Chapter 13 can only be filed by individuals. A typical case generally involves someone who has fallen behind in his mortgage payments, become delinquent with his priority taxes, or has debts that are generally non-dischargeable in a Chapter 7 (student loans, child support arrears, taxes and others).

Filing a Chapter 13 plan of reorganization takes into assumption that the individual has a source of income. Such income exceeds the individual’s household expenses. In essence, the individual has disposable income to be able to fund the plan of reorganization over 36 or 60 months.

Think of Chapter 13 as debt consolidation with a few perks. No more, no less. While paying back one’s debt may not sound like an advantage, a chapter 13 debtor has the power to propose a payment plan that, with the court’s approval, all creditors must accept. Depending on the debtor’s income, this plan may pay back only a small fraction of the total debt. Upon successful completion of the bankruptcy, any remaining unpaid debt may be discharged by the Court.

Chapter 13 has additional perks. Only in this type of bankruptcy can a homeowner strip–or avoid–a second deed of trust from their home. Doing so requires that the value of the home be less than the principal owed to the first trust deed holder.

Finally, the automatic stay comes into play in chapter 13 cases as well. Paired with its ability to force creditors into accepting payments according to a plan proposed by the debtor, chapter 13 is especially well-suited to saving homes from foreclosure and paying back federal and state tax debts.