There are several reasons why debtors file Chapter 13 bankruptcy. The first reason is to benefit from the automatic stay. The automatic stay is what prevents creditors from collecting debt from people in bankruptcy. Once a bankruptcy case is filed, creditors are required by federal law to stop all attempts to collect debts. This includes repossession of cars and foreclosure of real property such as a home. It also includes phone calls from creditors, lawsuits, wage garnishments and all other attempts to collect debts incurred prior to filing bankruptcy. The automatic stay is a powerful tool of the Bankruptcy Code. Creditors who violate the automatic stay risk having financial penalties imposed upon them by a bankruptcy judge.
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The second form of relief available in a Chapter 13 bankruptcy case is the discharge. Once a bankruptcy debtor completes a Chapter 13 case, all creditors are barred from future collection of the debts listed in the bankruptcy schedules, unless the Chapter 13 plan provides that the debt survives the discharge or for some reason the debt is not dischargeable. The discharge shields a debtor from future collection of all pre-petition debt permanently.
Debtors who file Chapter 13 bankruptcy don't receive these protections without giving something in return. In order to receive a discharge, debtors must file a Chapter 13 plan. The Chapter 13 plan explains to the court how the creditors are to be repaid in the bankruptcy case. Not all creditors are treated the same way in Chapter 13 plans. Secured creditors such as mortgage companies and creditors providing loans for the purchase of automobiles can be paid through payments to a trustee or the plan may provide that the debtor will continue to make payments outside the plan by paying the creditor directly. Priority creditors include debts owed to the Internal Revenue Service for taxes and past due child support. In most Chapter 13 bankruptcy cases priority creditors are paid in full. In addition to curing past due taxes and child support in the plan, debtors must continue to file tax returns each year and continue paying their child support.
Unsecured creditors are paid if the debtors have disposable income and are able to pay these creditors in the plan. Unsecured creditors may receive no payments in a plan, they may be paid in full, or they could receive a partial payment. Student loan debt is not dischargeable and any portion not repaid in the plan will have to be paid after the bankruptcy case is finished. At the end of the Chapter 13 bankruptcy case, debtors receive their discharge, and if all goes well they receive a fresh start having wiped out most or all of their unsecured debt, paid off their priority debt, and repaid secured creditors provided for in the plan.
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