Types

• Prior to 2005, Chapter 7 was the most common form of bankruptcy. A change in the federal bankruptcy laws that year created a means test that prevents most debtors from filing Chapter 7, and forces them into Chapter 13. The means test is based on the median (not the average) income in the debtor's state of residence. If the annualized average monthly income (average of previous three months multiplied by 12) is more than median income for the state, the debtor will have to file for Chapter 13. Since most debtors fall in this category, most can only seek a Chapter 13 filing.
  
  

Size

• Chapter 13 has both maximum and minimum requirements for income and debt. If the debtor's monthly disposable income is insufficient to pay off their debts over 60 months, they will be unable to have a Chapter 13 repayment plan approved. At the same time, a debt ceiling is enforced that's adjusted for inflation every three years. The limit on total secured debt in 2007 was $1,010,650, the maximum amount total unsecured debt was restricted to no more than $336,900. If debts in these categories exceed the debt ceiling, the bankruptcy will either be discharged or transferred to another chapter.
  
  

Considerations

• As with all bankruptcy chapters, a debtor must complete a debt counseling program within 180 days prior to filing for Chapter 13. The federal court system maintains a list of approved debt counseling services. The counselor cannot give legal advice or review your court documents, but they can look at the information you provide them and get you started on formulating a repayment plan.
  
  

Features

• After filing an initial petition and a thorough financial accounting, the Chapter 13 debtor meets with the court appointed trustee creditors. The debtor has the first priority for submitting a repayment plan. Some secured debts can be crammed down if the market value of the collateral is less than the outstanding debt. If the repayment plan is rejected by the creditors or the court, the trustee works with the parties to negotiate a workable plan of either three or five years. When a plan is approved by the court, the debtor makes the required monthly payments to the trustee, who distributes them to the creditors.
  
  

Significance

• Immediately after filing for Chapter 13, it will be difficult for a debtor to obtain a loan. Lines of credit might jump to a higher interest rate or be canceled altogether. If at all possible, the debtor should keep open at least one line of credit, though it should be used sparingly and paid in full each month. The bankruptcy is officially discharged once the repayment plan is completed satisfactorily, in either three to five years. After this time, it will still be more challenging and more expensive to get loans, but not impossible. After ten years from filing, the bankruptcy disappears from the credit report altogether.