I often times refer to a Chapter 13 bankruptcy as a “consolidation on steroids”. Chapter 13 is referred to as a reorganization of your debts. The best part of a Chapter 13 is that you can generally prioritize your most important debts, and pay those debts before any payment on less important debts. For instance, your home and your vehicles can be paid before any distribution is made on credit cards, medical debt, or other unsecured loans. Essentially, a Chapter 13 is a payment program that is built around your budget. First, you calculate all of your take-home income (net wages). Then, you calculate all of your reasonable and necessary living expenses, including such items as food, groceries, transportation, medical expenses, monthly utilities, cell phones, childcare, etc. The amount that is left over from your take-home pay after you deduct your living expenses (called your “projected disposable income”) is the amount you generally pay to your creditors on a monthly basis. By way of example, I recently filed a Chapter 13 for a client who was paying over $1,500 per month combined on minimum credit card payments, medical debt, and other unsecured loans. After we reviewed her budget, she was able to reduce these payments down to about $200 per month. She was also able to keep her home and her vehicle. After approximately 3 to 5 years of payments, the unpaid balance of her credit card debt, medical debt, and other unsecured loans will be discharged. Discharge means that she will no longer be required to pay the debt. Her creditors cannot contact her, send her letters, or otherwise attempt to collect the debt while she is making her monthly payments, and once she is done, they can never, ever come after her again. Of course, there are exceptions to these rules that you will want to discuss with your attorney, such as student loans, income taxes, and others. But the bottom line is that a Chapter 13 is a very powerful, legal form of consolidation that allows you to keep more money for your reasonable and necessary expenses, and pay much, much less money to your creditors, all while being protected from phone calls, debt collection letters, and lawsuits.
Written content provided by attorney Andrew L Ruben