Unlike Chapter 7, which can completely wipe out unsecured personal debts such as credit card bills and medical debt, Chapter 13 is a way to re-organize your finances and pay off some or all of your debts over a period of 3 to 5 years. Chapter 13 is also known as a wage earner’s plan, because individuals in this form of bankruptcy must have a regular income and provide a plan to the court showing that the person can repay all of part of his/her debts.
To do a Chapter 13 filing, the courts require that a debtor first gather a slew of information, including creditors’ names, addresses, and the amount of debt owed to each. A person filing bankruptcy must also put together a variety of “schedules,” namely, an income and expense schedule, a schedule outlining his or her assets and liabilities, and a schedule showing unexpired leases and executory contracts (i.e. those where a borrower has a material unperformed obligation). Lastly, the debtor must provide the Bankruptcy Trustee with a statement about the individual’s financial affairs. Taken together, these documents will give the Chapter 13 Trustee a sense of one’s overall financial picture.
With a Chapter 13 filing, The court issues an “automatic stay” protecting a bankruptcy filer from further actions by creditors. This means creditors can’t initiate or continue any collection activity against you, including foreclosure, lawsuits, repossession, wage garnishments, or even just harassing phone calls. Therefore, a Chapter 13 filing can also be used to keep certain assets, such as a home or car.
Also, under Chapter 13, when there are co-signers on debts such as a mortgage, both people on the loan do not have to actually file for bankruptcy in order to reap the legal and financial protections afforded by bankruptcy.
This is good news for co-signers of debts because, with a Chapter 13 petition, the filing also provides a “co-debtor stay,” which means that creditors can’t try to collect a consumer debt from another individual who is also liable with the debtor for the debt.