People often wonder about these “Chapters” they read about in the papers – an airline filing for Chapter 11, a person filing for Chapter 7 or Chapter 13. What are all these Chapters and why are people filing them? Let's take a look at the most important among these – Chapter 13.
You don’t have to worry about Chapter 11 as an individual person – that's for businesses alone. As for Chapter 7 and Chapter 13, they are for people like you and me. When you file for bankruptcy under Chapter 7, the court completely relieves you of all your debt. You are a free man. Chapter 13 on the other hand is nowhere near as simple.
The court just helps you structure things so that you can pay your debts off. If you have a good job and there's regular income coming in, this is the Chapter to file under. They give you three or five years to pay your debts off and you have to live frugally so that you can scrape out living expenses after all the payments are done with.
The good thing about Chapter 13 is that once the 3-to-5-year period is over, whatever you've not been able to pay off – is just excused. So in this way, it's a bit like Chapter 7 – you do get a free ticket out of those unpleasant obligations. Perhaps this doesn't really make it clear to you that the question of what is Chapter 13 exactly. Let's take a quick practical example to clarify things.
Let's say that I earn $1600 a month. All of my basic expenses from food to rent, from the utilities to transportation – come to $1300 a month. That means I have $300 to spare. However, I have some terrible obligations. I haven't paid my mortgage in three months. I have credit card debt worth $10,000 and I haven’t paid my $2500 income tax bill. Whatever am I going to do?
Someone explains to me the basics of what is Chapter 13, and I go and file. The good news is, that I qualify for a three-year payment plan.
Right away, I get appointed a trustee, and he dips into my spare cash for his 10% commission. What remains is approximately $3200 a year over the three years. The trustee structures things so that I pay about $100 a month for my credit card debt and my medical bills, and about $50 a month for my IRS bill and my missed mortgage and so on.
Of course, you're thinking here that this doesn't really amount to much. And it doesn't. The great part is that I'm excused at least $15,000 at the end. Is it a great easy way to get out of your obligations? Well, not if you actually enjoy having some stranger taking all your money and making you live within your means.
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