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How does a Chapter 13 bankruptcy work?

When Tallahassee residents think of filing for bankruptcy, they most likely are thinking of what the law dubs a "Chapter 7" bankruptcy. In other words, the financially struggling family might think of a process in which they go before the bankruptcy court, sell whatever property they have which is not exempt from the bankruptcy if they have any such property, and then get an order relieving them from their debts.

There is another type of bankruptcy, less common but still often used, called a Chapter 13 bankruptcy. While some high wage earners may be forced under the law to file a Chapter 13 if they want to pursue bankruptcy at all, it also offers several potential financial advantages and may give some families some comfort about having to file for bankruptcy.

Unlike a Chapter 7, debtors in a Chapter 13 bankruptcy will keep all of their property without having to turn any of it over to the bankruptcy court's trustee. They may, however, choose to give up a piece of collateral, like a house or a car, if only to clear that payment off of their books.

Instead, the debtor will, as part of the bankruptcy, propose a payment plan to the court, which the court must approve and to which creditors may agree to or choose instead to fight in court. The idea behind the payment plan is for the debtor to keep enough income coming in to meet their basic needs but then to pay some extra toward their debts in one consolidated payment to the bankruptcy trustee.

The amount of the payment plan will depend on a number of factors, and the monthly payments can last anywhere from three to five years.

A Chapter 13 bankruptcy is a handy tool for preventing foreclosure in the long-term, handling multiple mortgages and other types of debt and, in the right cases, even dealing with small business debt. A Florida resident in financial trouble may want to discuss with an attorney experienced with bankruptcy whether Chapter 13 is the right option for them.

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