Common Chapter 13 bankruptcy myths

Chapter 13 bankruptcy is a useful form of debt relief in which debtors set up a payment plan to repay some or all of their debts over the course of three to five years. In order for file for Chapter 13, debtors must make a regular income. Whether that income is above or below the state median income will determine the repayment period time span. Although a Chapter 13 bankruptcy is a fairly straightforward process, it is frequently misunderstood. The following are some of the most common Chapter 13 myths and misconceptions.

Myth: the bankruptcy court trustee will determine your reorganization plan.

Although a trustee may object to your proposed repayment plan, it's ultimately up to you to determine a plan to appropriately pay back your creditors. The trustee's only job is to ensure that you abide by the terms of the bankruptcy agreement. His or her goal is to protect creditors while still following bankruptcy laws that are designed to protect all parties involved in the bankruptcy process. If the trustee does reject your plan, you can appeal that decision to the court.

Myth: those who pass a means test cannot file for Chapter 13.

Passing a means test does not make you ineligible for Chapter 13. Rather, it opens up an alternative form of bankruptcy while keeping Chapter 13 as an available option. However, Chapter 7 bankruptcy lacks many of the benefits of Chapter 13. For example, Chapter 13 allows you to consolidate your debts into a single plan and extend certain financial obligations.

Myth: you'll still owe all of your debt after filing for Chapter 13.

This is only true if the bankruptcy court determines that your DMI, or Disposable Monthly Income, is large enough to support 100 percent repayment in three to five years. This is not the case for the majority of people who file for Chapter 13.

Source: Bankruptcy Home, "Some Myths About Filing a Chapter 13 Bankruptcy", 30 March 2011