CHAPTER 13 BANKRUPTCY

Chapter 13 bankruptcy, often called debt reorganization, is quite different from Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, you don’t have to hand over any property, but you must use your income to pay some or all of what you owe to your creditors over time – from three to five years, depending on the size of your debts and income. If you’re fighting to keep your home, filing for chapter 13 bankruptcy can be advantageous for many reasons. It’s one of the few options that may stop foreclosure, protect your car and clear debt tied to mortgages and credit cards. Through chapter 13 bankruptcy, you may be able to catch up on overdue mortgage payments while keeping your valuable property. Chapter 13 may also help you clear debt tied to medical bills, utility bills and personal loans.

You are Behind on Car Payments and Trying to Save your Car from Repossession If you are behind on your car payments and are facing repossession, filing Chapter 13 bankruptcy will stop all repossession proceedings and allow you to catch up on missed payments in the Chapter 13 plan and keep your car.

Qualifying for Chapter 13

Chapter 13 bankruptcy isn’t for everyone. First, chapter 13 is for individual debtors only, not businesses. Business debtors can file for either chapter 7 or chapter 11 bankruptcy. Also, because Chapter 13 requires you to use your income to repay some or all of your debt, you’ll have to prove to the court that you can afford to meet your payment obligations. If your income is irregular or too low, the court might not allow you to file for Chapter 13. If your total debt burden is too high, you are also ineligible. In order to qualify for chapter 13, your secured debts cannot exceed $1,081,400, and your unsecured debts cannot be more than $360,475. A “secured debt” is one that gives a creditor the right to take a specific item of property or collateral (such as your house or car) if you don’t pay the debt. An “unsecured debt” (such as a credit card or medical bill) doesn’t give the creditor this right. You will also be required to complete a credit counseling session before filing your chapter 13 bankruptcy petition. Learn more about the Bankruptcy process here.

The Chapter 13 Repayment Plan

The most important part of your Chapter 13 paperwork will be a repayment plan. Your repayment plan will describe in detail how (and how much) you will pay each of your debts. Your payment will be made to the Trustee who will then make the appropriate distributions to creditors. The length of the repayment plan is usually 3-5 years.

How Much You Must Pay

Your payment plan must commit to paying any leftover disposable income (your income less certain allowed expenses and payments on secured loans, such as a mortgage or car loan) towards your unsecured debts, such as credit card debts and medical bills. Some creditors are entitled to receive 100% of what you owe them, while others may receive a much smaller percentage (or nothing at all). Your Chapter 13 plan must pay certain debts in full. These debts are called “priority debts,” because they’re considered sufficiently important to jump to the front of the bankruptcy repayment line. Priority debts include administrative expenses, child support and alimony, wages you owe to employees, and certain tax obligations. In addition, your plan will likely include your regular payments on secured debts, such as a car loan or mortgage (depending on where your case is filed), as well as repayment of any arrearages you owe on the debts (the amount by which you’ve fallen behind in your payments).

How Long Your Repayment Plan Will Last?

The length of your repayment plan depends on how much you earn and how much you owe. If your average monthly income over the six months prior to the date you filed for bankruptcy is more than the median income for your state, you’ll have to propose a five-year plan. If your income is lower than the median, you may propose a three-year plan. (To get the median income figures for your state, go to the United States Trustee’s website, www.usdoj.gov/ust, and click “Means Testing Information.”) No matter how much you earn, your plan will end if you repay all of your debts in full, even if you have not yet reached the three- or five-year mark.

If You Can’t Make Plan Payments?

If for some reason you cannot finish a Chapter 13 repayment plan — for example, you lose your job six months into the plan and can’t keep up the payments — the bankruptcy trustee may modify your plan, or the court might let you discharge your debts on the basis of hardship. Examples of hardship would be a sudden plant closing in a one-factory town or a debilitating illness. If the bankruptcy court won’t let you modify your plan or give you a hardship discharge, you might be able to convert to a Chapter 7 bankruptcy or ask the bankruptcy court to dismiss your Chapter 13 bankruptcy case (you would still owe your debts, plus any interest creditors did not charge while your Chapter 13 case was pending).

How a Chapter 13 Case Ends?

Once you complete your repayment plan, all remaining debts that are eligible for discharge will be wiped out. Before you can receive a discharge, you must show the court that you are current on your child support and/or alimony obligations and that you have completed a final budget counseling course with an agency approved by the United States Trustee.