About Chapter 13 Bankruptcy
Chapter 13 bankruptcy is also called a “wage earner’s plan”. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under Chapter 13, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” During this time the law forbids creditors from starting or continuing collection efforts.
Debtors work closely with their attorney to determine terms most favorable to their particular circumstances. The attorney drafts a written plan and submits it to the court for approval. Repayment begins about 30 days after your case is filed with the bankruptcy court, and the debtor is allowed a 3 to 5-year window in which to repay creditors. Debtors are permitted to retain all of their property. Creditors are required to follow the plan closely and cannot collect debts not outlined in the plan. The court oversees the entire process to ensure that debtor and creditor alike adhere to the terms of the plan.
Chapter 13 Bankruptcy Eligibility
To qualify for Chapter 13 your monthly income must be substantial enough to cover both the plan payments and your regular monthly expenses.
Any individual, even if self-employed or operating an unincorporated business, is eligible for Chapter 13 relief as long as the individual’s unsecured debts are less than $360,475 and secured debts are less than $1,081,400. These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a Chapter 13 debtor.
An individual cannot file under Chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. In addition, no individual may be a debtor under Chapter 13 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing.
For debtors who do not pass the Chapter 7 means test, Chapter 13 can provide a viable solution. Many debtors do not qualify for Chapter 7 but are in dire need of financial assistance – Chapter 13 can provide that relief.
Benefits Of Filing For Chapter 13
Filing for Chapter 13 can be powerful because it effectively stops actions such as wage-garnishment, repossession and home foreclosure. When debts go unpaid, creditors sometimes seek a judgment to begin wage garnishment. This means that a portion of your wages will go directly to repaying the creditor. Oftentimes this creates severe problems for debtors because they lose the ability to allocate their budget according to their priorities. Immediately upon filing for Chapter 13, wage garnishment ceases and creditors are relegated to receiving payments through the restructuring plan.
Perhaps most significantly, Chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. However, they must still make all mortgage payments that come due during the Chapter 13 plan on time. Another advantage of Chapter 13 is that it allows individuals to reschedule secured debts, other than a mortgage for their primary residence, and extend them over the life of the chapter 13 plan. Doing this may lower the payments.
Individuals with excessive back taxes and child support can also benefit from Chapter 13. These debts are not dischargeable under Chapter 7 but can be reworked with under Chapter 13. Chapter 13 allows debtors to eliminate interest and penalties and create a manageable payback plan. Debtors can make payments on unpaid taxes and child support over a five year period under Chapter 13. By restructuring debt in this manner, debtors can fulfill their financial obligations.
How Does Chapter 13 Work
Chapter 13 begins by filing a petition with the bankruptcy court serving the area where the debtor has a domicile or residence. Unless the court orders otherwise, the debtor must also file with the court:
- schedules of assets and liabilities
- a schedule of current income and expenditures
- a schedule of executory contracts and unexpired leases
- a statement of financial affairs.
- a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling
- evidence of payment from employers, if any, received 60 days before filing
- a statement of monthly net income and any anticipated increase in income or expenses after filing
- a record of any interest the debtor has in federal or state qualified education or tuition accounts.
- the debtor must provide the Chapter 13 case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case.
When an individual files a Chapter 13 petition, an impartial trustee is appointed to administer the case. The Chapter 13 trustee both evaluates the case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors.
Filing the petition under Chapter 13 “automatically stays” most collection actions against the debtor or the debtor’s property. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even make telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.
Chapter 13 also contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a “consumer debt” from any individual who is liable along with the debtor.
Debtors who file for Chapter 13 can provide input as to how their restructuring will proceed. Filing for Chapter 13 requires more involvement from the debtor than filing for Chapter 7. The first step is determining whether it is suitable to file for Chapter 13. As with Chapter 7, it is necessary to fully evaluate not only your debts, but also your assets, income and expenses. Chapter 13 is most appropriate for those with a regular income but who continue to have difficulty repaying debts and covering monthly expenses.
The most difficult part of filing for Chapter 13 is determining whether it is suitable to do so. An attorney can help you evaluate your circumstances. Call Skinner Law Group today at (480) 422-3440 to schedule your free bankruptcy consultation.