What is Chapter 13 bankruptcy?

Chapter 13 bankruptcy is a process that allows debtors to seek shelter from creditors and create a plan to repay debts while protecting their assets from liquidation. It is a common type of bankruptcy but is available only to individuals who have sufficient income to commit to a repayment plan.

Definition of Chapter 13 Bankruptcy

While Chapter 7 bankruptcy is the most common, some individuals may be eligible for a less destructive option. Under Chapter 13 bankruptcy, you have the opportunity to avoid foreclosure and reschedule payments on other debts. The process consolidates these debts into a single repayment plan and prevents collectors and creditors from contacting you.

How Chapter 13 Bankruptcy Works

When you file for Chapter 13 bankruptcy, you will file it in the state where you reside or where your business is established. You will need to submit financial statements, tax returns, a list of all debt obligations, and a credit counseling certificate. The courts will impose filing and administrative fees, which can typically be paid in installments.

Repayment Plan

Chapter 7 bankruptcy is a relatively short process and usually lasts from four to six months before the court issues a ruling. In contrast, Chapter 13 bankruptcy will last from three to five years, depending on the length of the monthly repayment plan approved by the court for repaying certain debts.

Note: The duration of the Chapter 13 plan will vary based on whether your household income is generally above or below the average income for your state. If your income is below the average, the plan typically must be for three years.

The Chapter 13 plan, or simply the repayment plan, is the essence of the Chapter 13 case. Chapter 13 is an attempt to “reorganize” your debts (or debts shared with your spouse) over time. It is a great tool for a debtor who is behind on mortgage payments or car payments. Those missed payments can be caught up through the repayment plan over time, thus saving the house from foreclosure or the car from repossession. The plan will also include any past-due payment obligations, such as family support and child support or recent income taxes.

The Chapter 13 plan can also include payments toward unsecured debts such as credit cards and medical bills. A calculation is made on your income and expenses to determine if you have any disposable income after meeting all your other obligations. You are expected to devote your disposable income to your repayment plan payment, and those funds will be used to pay unsecured creditors.

If you do not have enough disposable income to fully repay your unsecured debts over the term of the repayment plan, the court will only require that your entire disposable income goes toward these payments. As long as unsecured creditors receive as much as they would in Chapter 7, you will fulfill your obligations.

Chapter 13 Trustee

The Chapter 13 trustee acts as the primary contact for the debtor. The trustee will review the proposed repayment plan and has the authority to determine in bankruptcy court if they believe it is inappropriate. If the Chapter 13 plan is confirmed by the bankruptcy court, the trustee acts as an intermediary between the debtor and the creditors receiving payments. Specifically, the debtor makes monthly payments to the trustee. The trustee distributes the payments as specified in the Chapter 13 plan and issues payments to creditors.

Note: When you file for Chapter 13 bankruptcy, you must begin making payments to the trustee within 30 days, even if the court has not yet approved the plan.

Restrictions During Chapter 13 Bankruptcy

Chapter 13 bankruptcy carries some restrictions that are not present in Chapter 7, the most notable being the monthly repayment plan payment. Additionally, you will not be allowed to incur any additional debts without court approval. As in any case where you have liens against major assets, you will be required to maintain insurance coverage on those assets.

Disclosure

If

I continued with the repayment plan until the end, at which point any remaining consumer debts and eligible secured debts will be canceled. You may still have non-dischargeable debts, such as student loans. Chapter 13 dismissal is personal, meaning that anyone involved in the debts may still be liable for any outstanding debts after the Chapter 13 repayment plan ends.

Note: When you file for Chapter 13 bankruptcy, the signers on any of the debts included in your bankruptcy filing are protected from creditors until your Chapter 13 bankruptcy case is closed.

Chapter 13 Bankruptcy Eligibility Requirements

To be eligible for Chapter 13 bankruptcy, you must meet certain requirements:

• Debt limits: You must have less than $394,725 in unsecured debt and less than $1,184,200 in secured debt. (These are the latest numbers as of 2020, which are scheduled to be reviewed in April 2022 based on changes in the Consumer Price Index.)
• Compliance: You must not have willfully failed to appear in court, disobeyed court orders, or been voluntarily dismissed after creditors sought payment through bankruptcy court in the past 180 days.
• Credit counseling: Within the 180 days prior to filing, you must receive credit counseling from an approved agency.
• Income threshold: You must demonstrate that you have enough disposable monthly income to meet the obligations of the new repayment schedule, as well as ongoing payments on any mortgages and other secured debts.

These requirements apply to individuals, including those who are self-employed or operate an unincorporated business. Corporations and partnerships cannot file for Chapter 13 bankruptcy.

Chapter 13 vs. Chapter 7

Chapter 13 Bankruptcy Chapter 7 Bankruptcy

• Retain assets as long as you comply with the repayment plan Liquidation of non-exempt assets to pay debts
• Repayment plan lasts three to five years Discharged within four to six months
• Possibility of loan balance reduction No loan balance reduction
• Monthly payments throughout the repayment period No monthly payments

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Sources:

• Experian. “What Is Chapter 7 Bankruptcy?”
• United States Courts. “Chapter 13 — Bankruptcy Basics.”
• Ascend LLC. “Chapter 13 Debt Limits 2022: 3 Things You Need to Know.”

Source: https://www.thebalancemoney.com/what-is-chapter-13-bankruptcy-316135