Chapter 13 Bankruptcy

Chapter 13 bankruptcy or “reorganization bankruptcy” involves the renegotiation of debt payments in order for the debts to be paid over time. Whereas chapter 7 bankruptcy involves the liquidation of assets to pay creditors, chapter 13 does not involve the sale of assets to the same degree as chapter 7. Chapter 13 is common for those individuals whose income exceeds the limitations of chapter 7. Typically, debtors restructure their debt payments to be paid over the course of 3-5 years. In this document, we will cover the process of filing for chapter 13 bankruptcy, pros and cons of doing so, remaining debts after filing for chapter 13, and we will show some comparisons to chapter 7.

 

Chapter 13 Bankruptcy Eligibility Requirements

Cannot Be A Business Entity – Only people, not businesses, can file for this type of bankruptcy. That makes limited liability companies and corporations ineligible for chapter 13 bankruptcy. Business owners cannot file in the name of their businesses, but if they are a sole proprietor or partner then they can file for debt to which they are personally responsible. Commodity brokers and stock brokers are indeed ineligible for chapter 13 bankruptcy.

Credit Counseling Requirement – An approved credit counseling agency must have provided debt counseling within the past 180 days. In addition, in most cases the counseling results in the formulation of a sound repayment plan which must be provided to the courts.

Previous Bankruptcy Cases – Previously dismissed bankruptcy cases (within 180 days) could result in a automatic dismissal. Especially if the reasons were for willfully failing to appear in court or if the debtor requested the case be closed do to creditors seeking to lift an automatic stay.

Barred by Prior Bankruptcy – If someone has filed chapter 13 bankruptcy within the past 2 years, the debtor is ineligible.

Debts Not Too High – 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.

Income Tax Returns – 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.

Complete Repayment Plan – Some debts must be paid back in full. Three classifications of these outstanding debts: Priority Debts, Secured Debts, and Other Secured Debts.

Sufficient Income – 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.

How It Works

Filing for chapter 13 bankruptcy begins with petitioning the bankruptcy court which serves the area in which you live. 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 who’s income’s below the median income for the state in which you live, while the 60 month plan is for those who’s income is above the states median income.

Debtor’s Obligations

Debtors will have the following legal obligations when for filing chapter 13 bankruptcy:

  • Filing required forms and documents
  • Paying fees associated with filing forms
  • Making payments in accordance to your repayment plan

Trustee

An impartial trustee will be appointed to you when filing for chapter 13 bankruptcy. This person examines the case and acts as a disbursing agent, or middle man, to take payments from debtors and give those payments to the creditors.

Ch. 13 Bankruptcy Filing Requirements

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:

  1. Current income and expenditures
  2. Assets and liabilities
  3. Statement of financial affairs
  4. Executory contracts and unexpired leases
  5. Certificate of credit counseling and a debt repayment plan from said counseling
  6. Pay-stubs from employers within 60 days before the filing
  7. Any interest in federal or state education or tuition
  8. Tax returns for the most recent tax year.
  9. Tax returns for years prior to filing

In order to complete the required eligibility paperwork, the debtor must provide this information:

  1. List of all creditors, amounts owed and nature of the claim
  2. Documented proof of the debtor’s source, amount and frequency of income
  3. List of debtor’s property
  4. List of the debtor’s living expenses

Married people are obligated to obtain this information about their spouse regardless of whether they are filing for a joint petition or individual petitions. Failure to do so will result in a prolonging of the case until the household’s financial position can be established.

Automatic Stay

Automatic stay means that creditors are informed that you have filed for bankruptcy. therefore, creditors should cease most collection actions including wage garnishments, collection phone calls, initiate or continue lawsuits, among other collection actions. Certain types of actions are not affected by automatic stay. Chapter 13 bankruptcy involves a special automatic stay that protects co-debtor assets. Bankruptcy courts must authorize collection actions taken against those liable for the debtors outstanding consumer debt. A consumer debt is an expense incurred for family, household, or personal purposes.

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 lose if the debtor fails to pay mortgage payments after chapter 13 filing.

 

Creditor Meeting

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”.

 

Fees and Payment Options

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.

 

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.

 

Chapter 13 Bankruptcy Exemptions

 

Exemptions can vary from state to state so its important that the debtor be aware of state and federal laws regarding chapter 13 exemptions. Common types of exemptions include:

  1. Vehicles
  2. Jewelry
  3. Household appliances and furniture
  4. Personal items
  5. Family homes

Let a Bankruptcy Attorney Help You

Filing for chapter 13 bankruptcy can be a grueling process, one that you shouldn’t go threw alone. Always consider a consultation by a bankruptcy lawyer before filing. They will help determine if you need legal representation. Most attorneys offer consultation services for free.

Pros and Cons of Chapter 13 Bankruptcy

Pros

  • 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

 

F.A.Q.

Does filing for Chapter 13 bankruptcy stop creditors from collecting a debt?

Yes, a creditor may no longer pursue collection when a debtor files for bankruptcy. An automatic stay of debts takes effect as soon as you file the appropriate paperwork and pay the filing fee. This stay prohibits creditors from collecting debt from you. However, you must still pay spousal and child support, tax debt and pension loans.

Will a Chapter 13 bankruptcy discharge my student loan debt?

A bankruptcy court will usually require repayment of student loan debt. Chapter 13 bankruptcy treat student loan debt similar to priority debt which is debt that is payable in full similar to back taxes or child support. Due to the Bankruptcy Abuse Prevention and Consumer Protection Act, privately funded student loans are treated the same as student loans issued by the federal government. Student loan debt is only discharged if you can show undue hardship. A bankruptcy court considers factors such as poverty and inability to pay the loan due to disability.

If I miss a scheduled payment under my Chapter 13 repayment plan, can a creditor begin collection activities?

If you miss a scheduled payment,  under chapter 13 bankruptcy rules a creditor may file a move to dismiss the case. If a bankruptcy court dismisses the case then the creditor my resume collection activities. You may be able to prevent a case dismissal by showing you have the ability to repay the debt under the current payment plan or by requesting that a new plan be approved by the court.