How To Restructure Debts Under Chapter 13

Chapter 13 bankruptcy law exists to give people an opportunity to get their financial lives back on track. Restructuring is the name of the game and that's much different than you'll see in a Chapter 7 liquidation where most assets get sold. A Chapter 13 bankruptcy often allows you to keep most or even all of your assets as long as you comply with an accepted payment schedule. For that reason, though, there are several things you need to know before you decide to restructure your debt obligations under the law.

Are You Even Allowed to Do It?

This is the very first question that has to be answered. The court wants this issue addressed because there are two groups of people who should not seek to restructure their debts.

First, the court will not allow restructuring if it is convinced you are not going to be able to pay and will end up having to liquidate most of your assets anyhow. The court does not want to draw out a bad situation if the outcome is more likely than not inevitable. To that end, you will need to provide proof of your current income and bills as part of presenting a restructuring plan.

Second, the court wants to know that you really need to do this. Debt restructuring is not intended to be a way to get out of paying part of the bill. If you get caught willfully trying to do this, it can be charged as a crime called bankruptcy fraud. Generally, though, the case is just dismissed with prejudice, meaning it becomes a permanent "no" to allow you to declare bankruptcy under your current circumstances. You may be able to file a few years later, but don't be surprised if a judge frowns upon it.

What Do You Do?

The core of restructuring under the Chapter 13 bankruptcy law is the plan. You will present a plan to the court that explains how you will pay a certain amount of what you owe, say 85% of your current debts, within three to five years. Creditors have the right to propose rejections or revisions, too. A court-appointed trustee will referee the debate over the debts and present a final proposal to the court. A bankruptcy court judge will hear any arguments about any disputes, and then they will rule on whether a plan goes forward, what needs to be revised, and what the repayment timeline will be.