What is Chapter 13 Bankruptcy?
Chapter 13 is part of the Bankruptcy Reform Act in the United States. It lets people who are having money troubles reorganize their debts. This is different from Chapter 7 bankruptcy where debts are erased.
In Chapter 13, you make a plan to pay back your debts over 3 to 5 years. Most of the time, you get to keep your property like your house and car. The court has to approve your repayment plan.
Who Can File for Chapter 13?
Individuals with a regular income can usually file for Chapter 13. Your secured debts can’t be more than $1,257,850 and your unsecured debts can’t be more than $419,275. These numbers change every 3 years.
You have to go to credit counseling before you file. This helps you see if there are other ways to deal with your debts besides bankruptcy.
How Chapter 13 Works
Filing the Papers
You start by filing a petition with the bankruptcy court. You also have to file:
- Schedules of your assets and liabilities
- A schedule of your current income and expenses
- A schedule of contracts and leases
- A statement of your financial affairs
You have to pay a $235 case filing fee and a $75 miscellaneous administrative fee. You may be able to pay these in installments.
The Automatic Stay
When you file, something called the “automatic stay” goes into effect. This means creditors have to stop trying to collect from you, at least for a while. The stay stops:
- Foreclosure
- Eviction (unless the landlord already has a judgment)
- Utilities from cutting off service
- Wage garnishment
The automatic stay doesn’t stop some things, like criminal cases or child support.
The Repayment Plan
The most important part of your case is the repayment plan. This shows how you will pay back your debts over the next 3 to 5 years.
The plan has to pay certain debts in full. These are called “priority debts” and include things like taxes and the costs of the bankruptcy case.
The plan also has to show that unsecured creditors will get at least as much as they would have gotten if you filed Chapter 7.
You start making plan payments to the trustee within 30 days after you file, even if the plan hasn’t been approved yet.
The Meeting of Creditors
After you file, the court will schedule a “meeting of creditors.” You have to go to this meeting and answer questions under oath about your financial situation and the proposed terms of your plan.
Confirmation Hearing
No later than 45 days after the meeting of creditors, the bankruptcy judge must hold a confirmation hearing and decide whether your plan is feasible and meets the standards for confirmation.
Creditors can object to confirmation if they think the plan doesn’t meet the requirements. If the judge agrees with the objection, you can modify the plan or the judge can dismiss the case.
If the plan is confirmed, the trustee will start distributing funds to creditors. You must start making regular payments.
Pros and Cons of Chapter 13
Advantages
- You get to keep your property.
- You can include co-signers on consumer debts in your bankruptcy.
- You have up to five years to pay off non-dischargeable claims like alimony and child support arrears.
- You may be able to protect more property than you could in Chapter 7.
- Creditors can’t keep contacting you.
Disadvantages
- Your plan payments may be so high that you can’t afford your regular monthly expenses.
- If you miss payments, your case may be dismissed.
- You can’t take on new debt during your case without the trustee’s permission.
- Chapter 13 stays on your credit report for seven years.
What Happens After Chapter 13?
If you make all the required payments under your Chapter 13 plan, any remaining dischargeable debt will be discharged at the end. Some debts like student loans and criminal restitution can’t be discharged.
After discharge, creditors can’t try to collect discharged debts. But a creditor can enforce a valid lien against the debtor’s property after the bankruptcy case is over if that lien wasn’t dealt with during the bankruptcy.
You can only file Chapter 13 once every two years. If your case is dismissed, you may be able to file again, but the automatic stay may only last 30 days.
After you get a Chapter 13 discharge, you have to wait two years before filing another Chapter 13 case and four years before filing a Chapter 7 case.
Making the Decision
Chapter 13 can be a good choice if you’re facing foreclosure or you have assets you want to keep. But it’s a long process and requires a steady income.
You should talk to an experienced bankruptcy lawyer to find out if Chapter 13 is right for you. Many lawyers offer free consultations.
You can also get information from the bankruptcy clerk’s office or from legal services organizations. But remember, only an attorney can give you legal advice tailored to your situation.
Bankruptcy is a big decision with long-lasting consequences. Chapter 13 can give you a fresh start, but it’s not the right choice for everyone. Weigh your options carefully and get good advice before you decide.
