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How does a Chapter 13 bankruptcy work?

On Behalf of | Sep 15, 2020 | Bankruptcy

If you are like a lot of people in Massachusetts, you may have some familiarity or basic understanding of how a Chapter 7 bankruptcy works. However, you may not even know about a Chapter 13 bankruptcy or understand how it differs from its Chapter 7 counterpart. 

Both Chapter 13 and Chapter 7 bankruptcy plans offer assistance to consumers facing financial challenges but with very different structures. 

Structured repayment versus liquidation

In a Chapter 7 bankruptcy, some of a consumer’s assets may be seized and sold in order to repay creditors. As explained by the United States Court, this does not happen in a Chapter 13 bankruptcy. Instead, the Chapter 13 plan brings together a consumer’s approved debts and restructures them into one consolidated repayment plan. 

Per the plan, the consumer submits monthly payments to the bankruptcy plan trustee. The trustee, in turn, pays creditors per an agreed-upon plan. This continues over the span of 36 months to 60 months depending on the individual case. 

Chapter 13 means test

As with a Chapter 7 bankruptcy, a consumer must pass a means test to qualify for a Chapter 13 bankruptcy. This test reviews the person’s debts and income to ensure they have sufficient earning power to make the monthly bankruptcy plan payments over the duration of the plan. 

The Chapter 13 discharge

A consumer receives a discharge of all debts at the end of the Chapter 13 plan. 

This information is not intended to provide legal advice but is instead meant to give residents in Massachusetts an overview of how a Chapter 13 bankruptcy works and how it differs from a Chapter 7 bankruptcy plan.