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How to make a Chapter 13 bankruptcy work

Many people in Eastern Tennessee are aware that the United States Bankruptcy Code offers individuals two choices: Chapter 7, in which most debts will be discharged, or Chapter 13, in which the debtor undertakes to fulfill the terms of a plan for paying off debts over a period of 3 or 5 years. Chapter 7 requires the debtor to pass a "means test" by showing that his or her monthly income is below the median income in our state. Chapter 13 has no such test, and it provides a method to escape financial catastrophe for anyone with a regular income.

In order to qualify for a Chapter 13 proceeding, the debtor must demonstrate that he or she has a regular income and that the income will provide sufficient funds to pay off debts according to the plan approved by the court. The debtor must also show that he or she attended an approved course in financial management. The key to making the procedures in Chapter 13 work for the debtor is to accept the fact that the bankruptcy plan will be part of the debtor's life for three to five years after the court proceeding is concluded.

The central feature of a Chapter 13 proceeding is the payment plan prepared by the debtor and approved by the court. As long as the debtor makes all payments required by the plan, no debtor may institute a collection action. If the debtor should miss one or more required payments, the court may either revoke or significantly modify the plan. A debtor must make at least two critical life style adjustments. First, the debtor must learn to how to live on a fixed, reduced income for a prolonged period. Many debtors make their payments to the trustee through an automatic payroll deduction. The debtor is also required to obtain the trustee's approval before taking on new debt.

If the debtor makes all payments required by the plan, the court will discharge the all debts that are included in the plan. Some debts, such as home mortgages, may continue because their original term was longer than the plan's repayment period.

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