Chapter 13 bankruptcy, also referred to as a wage earner’s bankruptcy, allows to you repay a portion of your debt over time and have the remaining balance discharged. It is less common than filing for a Chapter 7 bankruptcy but can be a good option when you don’t qualify to have your debt completely erased.
How a Chapter 13 Bankruptcy Is Different
While a Chapter 7 bankruptcy forgives most types of unsecured debt, a Chapter 13 bankruptcy requires you to make payments on your debt over a period of three to five years. Your minimum payments are calculated according to your total debt, the type of debt, and your income. The payments are made to the Chapter 13 trustee and not the direct creditors—often through an automatic payroll deduction. If you make the payments according to the schedule, the remaining debt is forgiven at the end.
Debts that can’t be discharged via a Chapter 7 bankruptcy, such as student loan debt, alimony, and child support, also can’t be discharged in a Chapter 13 bankruptcy. The repayment process will simply allow you to catch up on missed payments. And, if your other debt is eliminated at the end of the repayment plan, this will make your continued obligations more affordable.
Only individuals can file for Chapter 13 bankruptcy. However, business debt that you’re personally responsible for can be included in the repayment plan—which means this might be a good option for a sole proprietorship that is experiencing financial difficulty.
Eligibility for Chapter 13 Bankruptcy
Most people who file for Chapter 13 bankruptcy earn too much income to qualify for a Chapter 7 bankruptcy filing or have assets that are beyond the exemption limits that they do not wish to liquidate. Other reasons to consider this type of bankruptcy include:
- You want to stop a foreclosure or a repossession on your home by repaying the arrears over time.
- You want a mortgage loan modification, so you’re able to afford to stay in your home.
- Your house is so far underwater that there is not enough equity to pay your first mortgage in full, and you’re seeking a way to “strip off” a second mortgage on the property.
- You filed a Chapter 7 bankruptcy and received a discharge of your debt less than eight years ago, but now need additional protection from your creditors.
You can be disqualified from filing for Chapter 13 bankruptcy if the court determines you don’t have enough income to repay a portion of your debt. You may also be disqualified if you have over $1 million in secured debt and more than $300,000 in unsecured debt. If you have too much debt for a Chapter 13 bankruptcy, you’ll be asked to file an individual Chapter 11 bankruptcy instead.
What to Expect
Credit counseling is required by law before filing for Chapter 13 bankruptcy. You must also complete a debtor education course before your case will be concluded and your debt is discharged.
In Chapter 13 bankruptcy, there are generally two required court appearances. You make your first appearance about four to five weeks after filing. There is a second court date when your Chapter 13 plan is confirmed.
If you experience a change in circumstances and are no longer able to afford your Chapter 13 payments, you can return to court to request a modification. Switching to a Chapter 7 bankruptcy may also be an option, depending upon the specifics of your financial situation.
Your Chapter 13 bankruptcy remains on your credit report for seven years from the date it is filed. It will negatively affect your ability to obtain credit initially, but rebuilding your credit score is possible with time and effort. You should start to see a steady improvement in your credit score within 6 to 12 months from the date the Chapter 13 bankruptcy is filed.
Alatsas Law Firm Can Help
Working with an experienced bankruptcy attorney is the best way to make sure your filing provides the maximum level of asset protection. We are happy to answer any questions you have and guide you through the process step by step.
Alatsas Law Firm is conveniently located for residents of Brooklyn, Queens, and Staten Island. Our ground floor office is handicapped accessible with a subway stop and two bus lines nearby. Contact us today to schedule a free, no-obligation initial consultation.