Step-by-step guide to Chapter 13 Bankruptcy

This process list will ensure you have everything in order before filing for Chapter 13 bankruptcy and know what to expect during the process.

Step 1: Weigh the Pros and Cons of Chapter 13 Bankruptcy

Consider these pros and cons before filing for Chapter 13 bankruptcy.

Pros Include:

  • Creditors will immediately stop calling on debts that are past due
  • You’ll get to keep your property
  • Your credit profile will be streamlined
  • In case of emergency, you can file for an additional chapter 13 bankruptcy
  • It has the potential to relieve unlimited amounts of debt

Cons:

  • Under this bankruptcy plan it may take up to 5 years to pay restructured debts
  • All credit cards will be lost
  • All extra cash will be tied up
  • Student loan debt will not be cleared
  • It will be virtually impossible to get a mortgage

Step 2: Examine Alternatives to Filing for Chapter 13 Bankruptcy

Consider these alternatives before filing for Chapter 13. These may be more beneficial to you depending on your situation.

Judgement Proof – A debtor with little money or nonexempt property which creditors can take to satisfy a court judgement is considered judgement proof.
Negotiate with Creditors – If you can negotiate with creditors for forgiveness or a new repayment plan then do this instead of filing for chapter 13

Step 3: Determine Eligibility

Eligibility for filing Chapter 13 Bankruptcy include:

  • Only people, not businesses, can file for this type of bankruptcy.
  • An approved credit counseling agency must have provided debt counseling within the past 180 days.
  • If someone has filed chapter 13 bankruptcy within the past 2 years, the debtor is ineligible.
  • Debtors with less than approximately $330,000 in unsecured debt are still eligible for chapter 13 bankruptcy. Secured debt must be lower than $1,010,650 in order to be eligible.
  • Debtor must provide proof that they filed their income taxes for the previous 4 years. This must be provided at least 7 days before the meeting of the creditors.
  • After accounting for expenses, the debtor’s income must be high enough to pay off debts in a reasonable amount of time. The debtor must also be able to afford to pay their trustee a commission based on a percentage of all payments made in the plan.

Common types of exemptions for Chapter 13 include:

  • Vehicles
  • Jewelry
  • Household appliances and furniture
  • Personal items
  • Family home

Step 4: Consider Your Home

If a home is in the process of being foreclosed on, a chapter 13 filing will halt the foreclosure. If the debtor can catch up on payments in a reasonable amount of time then the home can be saved from liquidation. The debtor may still lose their home if the foreclosure sale is completed by the mortgage company before the debtor files the chapter 13 petition. The home can also be lost if the debtor fails to pay mortgage payments after chapter 13 filing.

Step 5: Seek Credit Counseling

Debtors must attend credit counseling by an approved agency within 180 days before filing for bankruptcy. Counseling will help debtors decide which bankruptcy option is right for them or whether alternatives are more beneficial.

Step 6: Filing for Chapter 13 Bankruptcy

In order to file for chapter 13 bankruptcy, the debtor must file a petition with the bankruptcy court. These courts are geographically based. In addition to filing a petition, the debtor must also file the following:
Current income and expenditures
Assets and liabilities
Statement of financial affairs
Executory contracts and unexpired leases
Certificate of credit counseling and a debt repayment plan from said counseling
Pay-stubs from employers within 60 days before the filing
Any interest in federal or state education or tuition
Tax returns for the most recent tax year.
Tax returns for years prior to filing

In order to complete the required eligibility paperwork, the debtor must provide this information:
List of all creditors, amounts owed and nature of the claim
Documented proof of the debtor’s source, amount and frequency of income
List of debtor’s property
List of the debtor’s living expenses

Step 7: Attend Meeting with Creditors

On average, a meeting is held 20 to 50 days after the debtor files the chapter 13 bankruptcy petition. This meeting is between the debtor, the trustee, and the creditors. If the location of the meeting does not have bankruptcy administrator staff members, then the meeting must take place within 60 days of filing. During the meeting, the debtor is put under oath by the trustee and is then questioned by the trustee and the debtor. If filing jointly, both parties must be present. Due to a conflict of interest in maintaining independent judgement, the bankruptcy judge is not allowed to attend this meeting. Debtors should ensure that they have a comprehensive and precise petition and plan by collaborating with the trustee beforehand. Unsecured creditors are required to file their claims within 90 days after the first date of the meeting of creditors. Government units are allowed up to 180 days to file a “proof of claim”.

Step 8: Attend Personal Financial Management Counseling

Like the counseling before filing for bankruptcy, in order to receive bankruptcy discharge the debtor must attend personal finance management course approved by the U.S. Trustee’s office and produce a certificate of completion.

Step 9: Fees and Payment

Courts are required by law to charge at least a $150 case filing fee in addition to a $39 administrative fee. The payment is typically submitted with the filing, but payment plans can be arranged. If it is determined that your financial situation is destitute, then the fees may be waived completely. The number of payments is limited to four and the final payment must be completed within 120 days of filing for bankruptcy. If filing jointly, only one administrative and case filing fee is incurred. If you fail to make any of these payments, the case can be dismissed.

Step 10: Attend Repayment Plan Hearing
Upon completion of the creditor meeting, the creditors, the debtor, and the trustee will attend a court hearing on the debtor’s chapter 13 bankruptcy repayment plan. Debtors will propose a a 36 to 60 month payment plan to the court in which time debts will be repaid. The thirty-six month plan is for those whose incomes below the median income for the state in which you live, while the 60 month plan is for those whose income is above the state’s median income.