THE BASICS OF A CHAPTER 13 BANKRUPTCY
Sometimes, debts can become overwhelming. Modern living is expensive – cars, cellphones, mortgages, paying for streaming services, bottled water – it just seems that we pay for so much now that we never paid for before. And it almost doesn’t matter how much income you earn. The debt load of day to day living can overwhelm, and falling behind, even just a little, can spiral out of control.
When that happens, many turn to bankruptcy for help. That’s what bankruptcy laws are for – to help people get out from under their overwhelming debts and get them a fresh start.
There are a few choices for bankruptcy filers to consider – but the most common are Chapter 7 or Chapter 13 bankruptcy.
People with little or lower income remaining at the end of each month and minimal assets usually choose to file for Chapter 7 bankruptcy. Filing a chapter 7 wipes out (discharges) qualifying debt in four to six months without the need to repay creditors. This is the preferred filing to get a fresh start, and a bankruptcy attorneys, we make every effort to find a way to get our clients qualified for a Chapter 7 bankruptcy.
But for some people who, especially those who earn a significant income or who want to protect valuable property (like a house with significant equity) then a Chapter 13 bankruptcy may be their only option. In exchange for debt relief, these filers pay their discretionary income to their creditors over the course of a three- to five-year repayment plan. In this article, we will explain a little how the overall Chapter 13 process works.
Chapter 13 Eligibility
Chapter 13 bankruptcy isn't for everyone. Here are a few requirements you should know upfront.
Debt limits. Secured debts and unsecured debts cannot exceed certain amounts. (Find the figures in What Are Chapter 13 Bankruptcy Debt Limitations?) A "secured debt" is essentially a debt that has collateral attached to it – think of a car loan or a mortgage, for example- if you don’t pay back the debt, the bank can repossess or foreclose on the asset. An "unsecured debt" (such as a credit card or medical bill) doesn't give the creditor the right to take back property. If your total debt burden is too high, you’ll be ineligible, but you can file an individual Chapter 11 bankruptcy, instead.
Steady income. When filing a Chapter 13 plan, you have to show to the bankruptcy court that you have a regular income that is sufficient to meet the plan obligations – irregular income, like if you are paid by commissions that vary, can make you ineligible.
Not a business. A chapter 13 bankruptcy is not available to a business – its limited only to individuals. However, business-related debts that you’re personally responsible for will be part of your plan, and therefore, from a practical standpoint, a sole proprietorship might be able to benefit from this chapter.
The Chapter 13 Process
Filing and completing a Chapter 13 bankruptcy case is far more complicated than Chapter 7 bankruptcy. Here’s a snapshot of the process.
Mandatory Courses and Filing Fees
When you file your official bankruptcy forms with the court clerk, you’ll pay a bankruptcy filing fee and present a certificate demonstrating that you received the mandatory credit counseling education from an agency approved by the United States Trustee's office. The session helps evaluate whether you have sufficient income to repay your creditors. You’ll take a second “debtor education” course after filing your case. As part of our process at the Alatsas Law Firm, we provide you with the resources to complete these courses, including a prepaid link to the courses.
The Chapter 13 Repayment Plan
The most important part of a Chapter 13 case is the repayment plan that you’ll propose to your creditors and the court. Amongst other things, the plan must take into account each of your debts. The plan must be prepared in compliance with local bankruptcy court rules.
Your creditors and the bankruptcy trustee will have an opportunity to object to your plan – and sometimes changes will need to be made in order to get your plan approved. If you’re able to make changes and get everyone to sign off, the court will likely approve (confirm) your plan at the confirmation hearing.
Even while the plan is in the process of being confirmed, you will be required to start making payments – typically within the first month of filing your case.
The Confirmation Process
Chapter 7 is the liquidation chapter – that means that the trustee is empowered to sell your non-exempt assets in order to satisfy debts. This typically isn’t necessary if we are able to properly evaluate your case, and identify all of the exemptions that apply.
By contrast, a Chapter 13 protects the debtor’s assets, because the trustee doesn’t sell the debtor’s property. Instead, the debtor must develop a plan to repay creditors over a period of time. Most plans will include provisions that allow the debtor to pay creditors less than the amount owed.
Before the plan goes into effect, the bankruptcy court must approve or “confirm” it at a confirmation hearing. Creditors will have an opportunity to object to the plan beforehand.
If there are no objections, the judge will confirm the plan as long as you meet the following requirements:
the plan is feasible (for instance, the debtor has enough income to pay the creditors as provided)
the debtor proposed the plan in good faith (the debtor isn’t trying to manipulate the bankruptcy process), and
the plan complies with bankruptcy law.
After confirmation in a Chapter 13 case, the debtor must complete the three- to five-year repayment plan before any debts get wiped out.
Chapter 13 cases can be difficult to complete successfully. Although it’s possible to represent yourself in a Chapter 13 case, doing so is rarely successful, and most courts encourage filers to retain counsel.
Priority debt. Your Chapter 13 plan must pay certain debts—called priority claims—in full. Priority claims include child support and alimony arrearages, and most tax obligations.
Secured debt. If you want to keep a car or house, you’ll have to continue to pay your regular payment on the car loan or mortgage. Whether you’ll have to pay these amounts as part of your plan will depend on your local court. If you’re behind on payments, you’ll have to repay the arrearages in your plan.
Unsecured debt. The plan must apply your disposable income (the amount remaining after paying secured and priority debt, as well as allowed living expenses) toward unsecured debts, such as credit card balances and medical bills. You don't have to fully repay these debts, or even pay them at all, in some cases. You just must show that you are putting any remaining income towards their repayment.
Value of nonexempt property. You’re allowed to keep all of your property in a Chapter 13 bankruptcy if you can afford to do so. You’ll have to pay the value of any property that you can’t protect with an exemption through your plan.
Although the repayment length will depend on how much you earn, most filers will have a five-year plan. The only exception is that a three-year plan is available to people who qualify to file a Chapter 7 case but choose to file a Chapter 13 bankruptcy instead—perhaps to save a house or car, or to pay off a priority debt, such as child support arrearages or taxes. Even so, because the monthly payment will often be significantly lower over five years, it’s common for filers to opt for the more extended plan—primarily because it increases the likelihood that the court will confirm the plan.
If You Can't Make Plan Payments
A lot of financial changes can occur over the course of your plan. But that doesn’t mean you’re out of the plan automatically.
If, for example, your income decreases, you might be able to modify the amount being paid to your unsecured creditors. If, however, you can’t pay a required debt, the court might let you discharge your debts due to hardship.
If neither options are feasible, you might be able to convert (switch) to a Chapter 7 bankruptcy. Keep in mind, however, that there’s a good chance that you’d lose your nonexempt property. The other option is to dismiss your Chapter 13 bankruptcy case. The downside to this approach is that you would still owe your outstanding debt balance, plus any interest creditors didn’t charge during your Chapter 13 case.
How a Chapter 13 Case Ends
After completing your repayment plan, you must show the court that you are current on your child support and alimony obligations and that you have completed the budget counseling course mentioned above. If you meet all requirements, the remaining balance on qualifying dischargeable debt gets wiped out. You should be debt free except for a mortgage or student loan if you have one.