Understanding Filing Chapter 13 Bankruptcy

When you file Chapter 13 Bankruptcy, you will be required to work out a repayment plan in which you pay off all or a portion of your debts. This will take place over a 3-5 year period. You (or your attorney) will actually put the payment plan together an will have it approved by a judge. This process will keep your creditors from harassing you as long as you continue to make the payments as outlined in your schedule. This method of bankruptcy can be a huge relief when you are in a situation where you can establish and live within the tight confines of the budget you'll need to pull this type of filing off.

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But, realize that a budget that demands that you be so frugal that it leads to constant misery for you and your family is a plan for failure. It's often been said that frugality is only misery in disguise. A Chapter 13 repayment plan, coupled with a reasonable budget does indeed have a good chance of being successful.

There are two tests that you must pass in order to file Chapter 13 Bankruptcy.

1. The Best Interest Test

This test mandates that unsecured creditors be paid at least as much as they would have received had you filed Chapter 7 bankruptcy.

2. The Best Efforts Test

This test requires that you pay all - yes, all - of your disposable income to the bankruptcy trustee or at least the first 36 months of the plan you submit. If your monthly income is more than the median for your state, you will be allowed a set amount for allowable expenses, as set by the IRS. The plan must run for 5 years instead of three. Otherwise, the amount of your payment will be based on your actual expenses, as long as they are not unreasonable.

With this type of bankruptcy, any debts left over after your plan is completed are cleared.

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