Table of Contents
- What is Chapter 13 Bankruptcy?
- Eligibility
- The Process of Filing
- The Impact of Filing
- Benefits
- Potential Drawbacks
- Alternatives to Chapter 13
- What is the difference between Chapter 7 and Chapter 13?
What is Chapter 13 Bankruptcy?
Chapter 13, often referred to as a wage earner’s plan, allows individuals with regular income to develop a plan to repay all or part of their debts. Under Chapter 13 bankruptcy, debtors propose a repayment plan to make income-driven installments payments, through the court, to all their creditors over three to five years.
Different debtors will have different Chapter 13 plans. For example: A debtor with limited disposable income, may pay just enough to cover an arrearage owed to their mortgage company and automobile loan, but pay very little to the unsecured creditors under the plan.
A debtor with significant disposable income may pay a higher percentage to his/her unsecured creditors if he/she can afford to do so. In both scenarios, whatever portion of unsecured debt is remaining unpaid after the 36-60 month payment plan, is discharged.
You might consider chapter 13 if:
- You are delinquent on your mortgage and facing foreclosure, but want to stay in your home.
- You can afford to pay some of your unsecured debt, but you need to get on a modified/reduced payment plan.
- You are not eligible for Chapter 7 because you have too much disposable income.
- You have nonexempt assets you don’t want to liquidate.
- Your wages are being garnished.
- You are facing repossession and want to keep your car.
- You owe a non-dischargeable debt that you need an extended or modified repayment plan for, ie: student loans, IRS liability.
Eligibility
To be eligible for this form of bankruptcy, you must have regular income and your unsecured and secured debts must fall within certain debt limits. “Regular income” is not limited to employment income. Income from retirement, social security, self-employment, and even a non-filing spouse’s income qualify you to file Chapter 13. The requirement to have income is so that you can propose a reasonable repayment plan for some portion of your debt. You must be able to show the court that your income/available resources are sufficient to provide for you and your family’s reasonable living expenses, in addition to a 36-60 month payment towards your debts.
The Process of Filing
The process of filing involves several steps. First, you’ll need to gather financial documents like pay stubs, bank statements, and tax returns. Then, with the help of a bankruptcy attorney, you’ll prepare and file your bankruptcy petition and proposed repayment plan. See the same question in Chapter 7.
The Impact of Filing
Filing for Chapter 13 can provide a structured way to manage and pay down your debts. For the duration you are in bankruptcy, your budget is scrutinized by the court which can require you to adjust your payment up or down.
The court can also require that your payment be garnished from your wages, and also that you be required to pay all or a portion of your tax refund toward your Chapter 13 plan. You will be prohibited from obtaining new debts (such as financing a car) without court approval. Additionally, like Chapter 7, your credit report will maintain the record of your bankruptcy filing for up to 10 years. However, after your repayment plan, you will likely be able to discharge a significant portion of your unsecured debt, and creditors will be willing to extend credit again to you.
Benefits
Chapter 13 offers several benefits to those struggling with debt. It is ideal for those who can generally afford their mortgage and/or car payments but had a temporary situation that caused them to fall behind and need the assistance of the court to propose an affordable repayment plan. Chapter 13 provides a chance to catch up on missed mortgage, by stretching out the arrearage over the 36-60 month plan. Car loan payments may be reduced, as well as the principal and interest rate, in addition to extending the loan term. The most significant advantage is the ability to keep your property while repaying your debts over time. Debtors are not required to liquidate nonexempt assets.
Potential Drawbacks
While Chapter 13 can provide significant relief, it’s not without potential drawbacks. The most notable is the length of time it takes – you’ll be in bankruptcy for several years, and you’ll need to live on a strict budget, approved by the court, during that time. Additionally, it will remain on your credit report for up to ten years.
Alternatives to Chapter 13
If Chapter 13 isn’t the right fit for your financial situation, there are alternatives to consider. These may include debt consolidation, debt settlement, or filing for a different type of bankruptcy, such as Chapter 7.
What is the difference between Chapter 7 and Chapter 13?
The result of both chapters is to discharge a portion of your debt. Chapter 7 allows you to discharge ALL of your dischargeable unsecured debt, whereas in Chapter 13 you are required to repay at least 1% of your debt. The difference between the chapters is that each seeks to accomplish a different goal, and your selection is based on your eligibility for either chapter, along with which one will benefit you most. I can assess your situation and advise you of the pros and cons of each during our initial consultation.
FAQs
How long does the process take?
The repayment plan in Chapter 13 typically lasts three to five years. There are options to convert the case to a chapter 7 at any time during the chapter 13 plan. Also, you can dismiss it if your circumstances change. Other options are to pay it off sooner, or to request a hardship discharge if your circumstances change for the worse during the plan term.
Can I keep my property if I file?
One of the key distinctions between chapter 13 and chapter 7 is that in Chapter 13 you are not required to turn over or liquidate any asset. In exchange for keeping property that might otherwise be nonexempt and liquidated in a Chapter 7 case, you are required to repay an amount equivalent to the nonexempt asset(s) in your Chapter 13. So yes, you can keep your property even if it is nonexempt.
Regarding property that is secured by a loan, like an automobile or home, in which you have defaulted on payments, yes, you can keep it free from foreclosure or repossession in chapter 13. One of the main purposes of Chapter 13 is to allow debtors to keep property secured by loans they have defaulted on, by proposing a repayment plan.
How often can I file for bankruptcy under this chapter?
It is possible to file multiple chapters without waiting between. However, if you completed and got a discharge in a prior chapter 13, you will not be eligible for a discharge unless the second case is filed more than two years from the date of the first discharge. The benefit to filing a chapter 13, even if you are not eligible for a discharge of any portion of your debts..is to get the protection of the Automatic Stay (prevents collection activities including foreclosure, lawsuits, repossession, harassment, etc), and to set up an extended payment plan.
If you want to file chapter 13 and be eligible to discharge any portion of your debts, you must wait two years from the date of your prior chapter 13 discharge to file your second case.
If you have a previous chapter 7 discharge, you can file chapter 13 four years later.
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