Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also called a wage earner’s plan, allows individuals with regular income to develop a plan to repay debts in more favorable terms than what came with the original debts. Typicaly there is no interest. Debtors propose a repayment plan that allows the debtor to make installments to creditors over a span of three to five years. The length of the plan will be three years if the debtor’s current monthly income is less than the applicable state median, unless the court approves a longer period "for cause." If the debtor’s current monthly income is greater than the applicable state median, then the length of the plan is typically five years. During this three to five year period the law forbids creditors from starting or continuing collection efforts, this is known as a "stay."
Chapter 13 process and timeline
There are various steps that need to be taken in order to successfully file for chapter 13 bankruptcy. Prior to filing for bankruptcy, you must receive credit counseling from an agency approved by the United States Trustees office.
Your case officially begins on the date your attorney files your petition with the federal court. Approximately 15 days later, the court issues a notice of commencement of the case to all your creditors. This notifies them that a “stay” is in effect, sets the date for a 341 meeting of creditors before a court-appointed trustee, and informs your creditors of the final date for filing any complaints or objections with the court (typically 30 days). Your planned repayment schedule must be filed within 15 days unless your attorney included it in the original petition. The 341 meeting of creditors is held approximately 20-40 days after your petition is filed. Unless the amount due to a particular creditor is extremely large, the creditors typically do not attend the 341 meeting of creditors. After the 341 meeting, if there are no issues, you can expect to receive your discharge between 60-90 days.
Once you complete your repayment plan, all remaining debts that are eligible for discharge will be wiped out. However, before you can receive a discharge the court must see that you have completed a budget counseling course with an agency approved by the United States Trustee, and, if applicable, that you are current on child support, alimony and/or student loans.
Eligibility for Chapter 13
Chapter 13 bankruptcy is not for everyone. Typically, chapter 13 is for those with a steady income. This is because it requires you to use your income to repay some or all of your debts. The court may not allow you to file for this type of bankruptcy if your income is too low or irregular. You may also be ineligible if your total debt burden is too high. Secured debts cannot exceed $1,010,650 and unsecured debts cannot exceed $336,900. Secured debts are those that give creditors the right to take a specific item of property, while an unsecured debt does not give creditors that right.
Businesses and sole proprietorships cannot file for Chapter 13 bankruptcy in the name of their business. If they wish to file in the name of their business, they must declare bankruptcy under Chapter 11. However, a business owner may file for Chapter 13 as an individual and include business-related debts for which the business owner is personally liable.
Some Advantages for Filing Chapter 13
- Provides you with more time to make your payments and settle debts
- Chapter 13 trustees may be flexible on terms and may allow you to reduce the amount of each payment or even surrender an item of your property in order to lower your payments.
- Once a successful repayment plan is completed, you are no longer obligated to pay creditors who were in the repayment plan in full
- Debtors are allowed to keep all property throughout the Chapter 13 process
- While a Chapter 13 bankruptcy does stay on your record, it will be easier to explain and is looked upon more favorably by lenders than missed debt payments, defaults, repossessions and lawsuits
- Filing for Chapter 13 can stop foreclosure proceedings and cure delinquent mortgage payments over time
- The sooner you declare bankruptcy, the sooner you can start rebuilding your credit
Some Disadvantages for Filing Chapter 13
- It can take up to 5 years to repay debts
- Debts must be paid out of your "disposable income," meaning that whatever income you typically have left over after necessities will be unavailable throughout the process
- You will lose all credit cards
- If you don’t already have a mortgage, bankruptcy will make it nearly impossible to get one in the future
- It will not relieve you of obligations towards alimony, child support or student loans
- You still may be obligated to pay some debts, like a mortgage lien, even after bankruptcy proceedings are completed
- If any payments under your plan are missed, your case will immediately be dismissed
Chapter 7 vs. Chapter 13
Both Chapter 7 and Chapter 13 bankruptcies have their advantages and disadvantages. There are several steps you can follow in order to make a comparison and determine which chapter is best for your specific case.
First, you must determine if you qualify for either a Chapter 7 or Chapter 13 bankruptcy. If your monthly income is less than or equal to the median income of your state, then you qualify for Chapter 7. If you do not qualify for a chapter 7, then you will have no choice but to file for Chapter 13 unless you can pass a means test which determines if a family or individual is eligible for financial aid from the government.
If you happen to qualify for both chapter 7 and chapter 13, you must determine which is more beneficial or desirable for you.
Chapter 7 allows you to have your debts forgiven, while Chapter 13 requires you to pay your debt, although typically at a lower rate than originally agreed upon.
Chapter 7 liquidates all of your non-exempt assets while Chapter 13 does not. Therefore, if you wish to keep some of your bigger items (such as a car or a home), Chapter 13 may be preferable.
Chapter 13 sets up either a 3 or 5 year payment schedule depending on your income. If you are unable to repay your debts within the time given on your schedule, then you may have to file for Chapter 7.
Our firm will be able to efficiently examine the details of your financial situation and determine which bankruptcy chapter is most beneficial for you and your specific situation.