What is Chapter 13 bankruptcy?
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Chapter 13 bankruptcy provides a viable option for those unable to qualify for Chapter 7, or for those who wish to keep their assets while still being able to get a better handle on debt. Of the various types of bankruptcy, Chapter 13 is known as the “wage earners” chapter and is classified as a reorganization plan under the Bankruptcy Code.
There are several important provisions to be aware of for Chapter 13 bankruptcy, but the main point is that this form of bankruptcy does not simply liquidate debt like Chapter 7. Instead, at least some of the total debt owed will be repaid during a 3 to 5 year time period, in exchange for keeping your property and other assets. With Chapter 13, debts are paid directly from regular income, wages or otherwise, through structured repayment methods. During the repayment time period, creditors cannot further their collection efforts against a debtor.
Chapter 13 bankruptcies have become a common form of consumer bankruptcy since changes were made to the Bankruptcy Code in 2005 making it impossible for many individuals to file Chapter 7 due to more stringent eligibility requirements. While Chapter 7 has an income cap, requiring you to pass what is known as a means test or make less than the median income in your state, Chapter 13 does not have this limitation. Further, Chapter 13 does not require debtors to turn over all non-exempt assets for sale as Chapter 7 does.
Eligibility – Who Can File for Chapter 13?
According to the Bankruptcy Code in January 2012, anyone is eligible for Chapter 13 “as long as the individual's unsecured debts are less than $419,275 and secured debts are less than $1,257,850” (11 U.S.C. § 109e). (These dollar figures are inflation adjusted with time.) Secured debts are those backed by some type of collateral, one example is a home mortgage; the repayment plan in Chapter 13 will include repayment of these types of secured debts. Unsecured debts are ones not backed by collateral, usually with higher risk and steeper interest rates, such as with credit cards, and any disposable income will go toward these payments.
In order to proceed with a Chapter 13 bankruptcy, it is required that a person go through approved credit counseling within 180 days prior to filing. In addition, as with all forms of bankruptcy, if the debtor has filed for bankruptcy less than 180 days prior to filing, and that case was dismissed due to delinquencies on the part of the debtor, they cannot proceed with a Chapter 13 at that time.
The Chapter 13 Reorganization Process
After determining eligibility for Chapter 13 relief, and undertaking credit counseling, the bankruptcy court will require a number of documents and schedules to be submitted such as: a petition to file; a list of assets and liabilities; the debtor’s current income and anticipated income and expenditures; executory contracts and unexpired leases; proof of credit counseling and any repayment plan drafted during counseling; among other schedules documenting past and future financial matters. Anyone going through this process should contact the courts directly or consult a bankruptcy professional for more specific information about what needs to be filed.
A filing fee will also be required. Although this is subject to increase, as of December, 2017, it is $310.
If a repayment plan was not fully drafted during credit counseling, you will need to create one.
The Repayment Plan
In a Chapter 13, the first step to creating a repayment plan is to make a list of debts you owe, which must be approved by creditors. The amount paid to the creditors on a monthly basis will be based on income. (Creditors will generally receive more repayment in a Chapter 13 than they would under Chapter 7). Certain debts will need to be prioritized such as child support payments or tax obligations. These are known as priority debts and they will need to be paid first.
As mentioned, repayment plans extend anywhere from 3 to 5 years, exactly how long will depend on a person’s specific income and debts. The plan will be set at 3 years if a debtor's monthly income at the time of filing is less than his or her state’s median income. But if a debtor's current monthly income exceeds that of the state median, the repayment plan will likely be extended to 5 years. At the end of this period, any remaining debts originally owed are forgiven or discharged and the bankruptcy filing is complete.
Deciding which chapter of bankruptcy to file is best done after consultation with a legal professional. Bankruptcy is a very complicated area of law and it is not recommended that a person attempt to complete the process without legal help. A bankruptcy lawyer can look at your finances and specific situation and evaluate the right courses of action.
If your Chapter 13 bankruptcy is already underway and you find yourself unable to make payments, your trustee may be able to alter your repayment plan to meet your current financial situation. If you have lost your job or run into unexpected hardships, a bankruptcy judge may discharge your debts. For these reasons, it is important to communicate with your trustee and bankruptcy attorney about any changes in your life that may affect your repayment plan.