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How does chapter 13 bankruptcy help individuals in debt?

Individuals who are having trouble repaying their debts, whether they live in New Jersey or some other state, have a few bankruptcy options, including filing Chapter 13. This type of bankruptcy is also known as the wage earner’s plan because it helps regular-income earners develop financial plans so that they can repay part or all of their debts.

With Chapter 13 bankruptcy, individuals have the chance to prevent foreclosure on their homes, whereas Chapter 7 means that the individuals liquidate their assets, including their homes and other property. With time, Chapter 13 could cure overdue mortgage payments, but the individuals still have to pay their mortgage during the Chapter 13 installment plan. Since other secured debts can be included in the plan, the payments to repay those debts could be lower overall. The debts are consolidated under one loan, and the individual makes the payments to a trustee, who passes the payments onto creditors.

When filing Chapter 13, individuals suggest their own plans to repay creditors in installments. If their monthly income does not meet the applicable state median, their plans are generally for three years. The installment period is usually five years if their monthly earnings are more than the applicable state median. Monthly income is based on the average earnings that the individuals received over the six months prior to the bankruptcy case being initiated. This includes their spouses’ income if the bankruptcy petition is filed jointly. During the time that the individuals are repaying their debts, creditors are prohibited from beginning or continuing debt collection efforts.

While bankruptcy is not an option for everyone, it can help some people who are at risk of losing their homes or other property. All individuals who are considering bankruptcy may find the advice of a lawyer helpful in deciding which option is best for their situations.

Source: United States Courts, “The Chapter 13 Discharge“, October 17, 2014

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