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Q.How Does A Chapter 13 Bankruptcy Differ From A Chapter 7 Bankruptcy?
A.Under a Chapter 13 Bankruptcy, the debtor is required to enter into a five-year repayment plan pursuant to which the bankruptcy petitioner must pay a certain amount of money each month to his or her creditors. The amount paid each month is based on a strict expenses-to-income formula. Under the old rules, people who filed a Chapter 13 Bankruptcy had to devote all of their disposable income -- what they had left after paying their actual living expenses -- to their repayment plan. The new bankruptcy law Chapter 13 filers still have to hand over all of their disposable income, but their disposable income is calculated using the allowed expense amounts dictated by the IRS, not the bankruptcy filer's actual expenses. These "allowed expenses" are generally much lower than actual costs.
If the bankruptcy applicant's income is higher than the median in their state (see, "Chapter 7 Eligibility Requirements"), the bankruptcy applicant will not be able to file a Chapter 7 bankruptcy and will have to file a Chapter 13 Bankruptcy Plan.
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