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What is Chapter 13 bankruptcy?

Chapter 13 is a bankruptcy plan that is sometimes called the wage earner’s plan. It allows the person who is filing to keep their property and pay the debts off over a certain amount of time. With the Chapter 13 bankruptcy plan, the debtor makes a written plan to pay off creditors over a period of 3-5 years. While the plan is in effect, the creditors are not allowed pursue collection actions against the debtor. There are many factors to consider when filing bankruptcy. The type of bankruptcy filing, eligibility requirements, filing process, and repayment plan influence the outcome of this legal action. It is important to know whether Chapter 13 is the correct choice for you.

Filing Chapter 13 vs. Chapter 7

Filing bankruptcy is a complex decision, and knowing your options helps you choose the best way to proceed. If you are ineligible to file Chapter 13 bankruptcy, you may be able to file under Chapter 7. Here are some comparisons for each chapter.

Chapter 7

This type of bankruptcy discharges some unsecured debt. A court officer will sell any nonexempt property to help pay outstanding debts.

  • Time frame – 3-4 months from start to completion
  • Property – may keep most property, but some will be used to help pay debt
  • Income – people with high income may not be able to file under Chapter 7
  • Foreclosures – can temporarily stop foreclosure, unless the individual cannot become current on payments
  • Eligibility – income must be less than the median of the state where you live, or you must pass a means test
  • Filing complexity – although there are several forms to fill out, you may be able to represent yourself

Chapter 13

Under this type of bankruptcy, the person filing repays creditors through a payment plan.

  • Time frame – 3-5 years from start to finish
  • Property – no liquidation of property
  • Income – must have a regular monthly income and repay most of your debt
  • Eligibility – no income requirements, but there are limits to how much secured or unsecured debt you may have
  • Filing complexity – nearly always requires legal representation

How Chapter 13 Bankruptcy works

You must file your Chapter 13 petition with the proper supporting documentation. These documents show that you have tried other ways of repaying debt. They also serve as evidence of your assets, debts, and income. Before you file, you must first try credit counseling to repay your outstanding obligations.

Credit counseling requirement

To file for bankruptcy, each debtor must obtain credit counseling from an agency approved by the United States Trustee’s office. When you file for bankruptcy, you must provide both a certificate of credit counseling and a copy of the debt repayment plan you and the debt counselor created. Credit counseling is not typically free, and you may also have to pay a processing fee for the documents you need.

Filing your petition

The next step in Chapter 13 bankruptcy is filing your petition. Debtors must file in the bankruptcy court that serves the same area as their residence. The courts charge a fee of $235 to file a case, plus a $75 administrative fee.

Unless the court orders otherwise, you must provide information in addition to proof of credit counseling. You must file the following financial evidence within 15 days of filing your bankruptcy petition.

  • All debts and amounts
  • All income, amount, and source for the 60 days before the filing date
  • Property list
  • Monthly expenses

Married couples may file joint bankruptcy or file separately. However, any married debtor must provide their spouse’s financial information as well, regardless of whether both spouses file separately or jointly.

Automatic stay

Once you file the bankruptcy petition, an automatic stay takes effect. The stay prohibits creditors from taking any action on collecting debts, such as foreclosure procedures, wage garnishment or debt collection calls until the bankruptcy period is over. The court sends notice to all debt collector listed in the petition and also assigns a trustee to the case. The trustee is responsible for holding a creditor’s meeting. He or she also receives payments from the debtor, then sends those payments on to the creditors.

The court then has 15 days to send a Notice of Commencement of Case to the petitioner and all creditors listed. The notice contains information about the case, such as deadlines for the claims and objections from debt collectors, and the time and date of the creditor’s meeting. The debtor has a 15-day deadline from the day they file for bankruptcy to submit a repayment plan.

Setting up a payment plan

When you file bankruptcy, the court sets up a plan to pay off all debt at or below the original amount. You must make the first payment within 15 days of filing for bankruptcy. The petitioner makes fixed payments to the court on a weekly, biweekly, or monthly basis. The court trustee distributes the funds to the creditors based on their priority.

Creditor claims

There are three different types of claims a creditor can make: priority, secured, and unsecured debt. The priority claims are the most important to pay off. With secured claims, the creditor can take the property back if the debt is not paid or may have other rights to the property. Unsecured claims are the debts where the creditor has no rights or cannot take away anything from the individual. The creditors are paid off in the following order: priority debts are paid first, the secured claims are paid next, and unsecured claims come last.

Repayment plan

The repayment plan is the most important plan of the Chapter 13 bankruptcy. This plan details the amount the court pays to each creditor. The repayment plan also includes how long the plan lasts, which is about 3-5 years on average. An official repayment plan form does not exist, but a court system or trustee may use a specific template for this plan. During the Chapter 13 bankruptcy period, priority debts must be paid in full. These include child support, alimony, and taxes.

Secured and unsecured debt

In addition to these priority debts, you much include regular payments on secured debts as well. Secured debts are loans made against collateral, such as a car or home loan. The plan also shows any leftover or disposable income after priority debt, secured debt, and living expenses are paid each month. The disposable income goes toward any unsecured debts the person owes. Examples of unsecured debts include credit cards and medical bills, which do not have to be paid in full.

Holding the bankruptcy confirmation hearing

A confirmation hearing is held within 45 days after the creditor meeting. At the hearing, the judge decides whether the repayment plan meets the bankruptcy code standards. Creditors are notified 28 days before the hearing is held; they may submit objections to the plan’s confirmation.

Once the plan is accepted, the trustee begins distributing funds to the creditors. In cases where the bankruptcy plan is denied, the court allows the trustee to cover costs by keeping part of the money already paid, but he or she must return any unpaid funds to the debtor. The court does not refund money already paid to creditors.

When the plan is confirmed, the individual is financially bound to the creditor and must ensure the plan succeeds. The debtor makes  payments to the bankruptcy trustee either directly or through automatic payroll deduction. The debtor may retain all property while the plan is in the process, provided all payments are being made. The debtor must not accrue any more debt during the hearing process. If the plan fails and the borrower does not make the correct payments, the case will be dismissed. In this case, the court may liquidate the debtor’s assets to pay their obligations.

Chapter 13 discharge

When the bankruptcy period is over, the may discharge any remaining unsecured debt, provided the debtor meets certain conditions.

  1. All child support and alimony payments are current.
  2. The debtor has not received a discharge in any prior cases filed within two years of filing a previous Chapter 13 petition or within four years of filing a Chapter 7 bankruptcy.
  3. The petitioner must complete financial management courses if available.

The discharge means that creditors who received payment under the bankruptcy plan cannot attempt to collect any remaining debt. There are some exceptions to this rule, including alimony, some taxes, child support, mortgages, student loans, and fines that result from certain negligent criminal charges.

Hardship discharge

If you cannot make payments during the plan due to loss of job or illness, you can apply for a hardship discharge. However, if you are not granted a hardship discharge, you may be able to switch over to a Chapter 7 bankruptcy plan. When a case changes from a Chapter 13 to a Chapter 7 bankruptcy, the court charges a $25 fee to the debtor.

 Weighing the pros and cons of Chapter 13 bankruptcy

As with any bankruptcy, there are pros and cons for Chapter 13 bankruptcy.

Pros                                                                                                      

  • Once the payment plan is successful and you pay off debt under the original amount of debt, the debt collectors may not obligate you to pay off the original full amount
  • You get to keep your property
  • There are specialized lenders for those who have had credit issues
  • You can start rebuilding credit sooner
  • It alleviates financial obligations (aside from child support and alimony)
  • Can refile after six months if your petition is denied the first time

Cons

  • It can take up to five years to pay off debt
  • All disposable income is used on debt
  • Bankruptcy affects your credit for ten years
  • You will lose all credit cards
  • It is very difficult to get a new mortgage unless you already have one
  • You cannot file Chapter 7 within six years of filing Chapter 13
  • You must still pay child support, alimony, and student loans
  • You still have an obligation to pay your mortgage lien after the bankruptcy is complete

A Chapter 13 bankruptcy helps people who are facing financial problems keep their property while catching up on any past-due payments. Once all payments have been paid, then the unsecured debt that is left over may be discharged. Under a Chapter 13 bankruptcy plan, people successfully pay off debt they are behind on without losing important property like a home or vehicle. 

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