Why chapter 13 bankruptcy is called reorganization.
Chapter 13 is most commonly referred to as “reorganization” because you are given the opportunity to rearrange your debt. Rearranging debt offers many different options depending upon the type of debt at issue. Sometimes debt that is secured by collateral can be rearranged to decrease the total amount due for that particular debt. For example, if you purchased an automobile more than 30 months prior to filing an Arizona chapter 13 bankruptcy and the value of the vehicle is less than the amount of the debt on the vehicle you will only have to pay the creditor the value of the vehicle over the life of your chapter 13 plan and you won’t be responsible for any deficiency. This is known as a “cram down”.
Likewise, if you own a home worth less than the amount owed on your first mortgage than any other mortgage on the home can be “stripped” which could substantially reduce the total amount that must be paid before your home is free and clear of any debt.
This is a great article on NOLO which discusses chapter 13’s at greater length. Consult an tucson bankruptcy attorney for more information.