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What is a Chapter 13 Bankruptcy?

A magnifying glass showing the word 'Bankruptcy' overlaid on the New York City skyline

Chapter 13 of the Bankruptcy Code provides for an adjustment of debt to be repaid by an individual with regular income. It allows the debtor to keep property and repay debts over a three (3) to five (5) year period.

Also known as the wage earners plan, it enables individuals with regular income to develop a plan to repay all or a portion of their debts. This can range from 1% to 100%, depending on the debtor's circumstances.

Under Chapter 13 laws, the debtor creates a repayment plan to pay off creditors over time. If the debtor's current monthly income is greater than the state median, the plan will usually have to be for five years. No plan can be longer than the five year limit, as stated in 11 U.S.C Sec. 1322(d).

The code also says, "while the debtor is in Chapter 13, the law forbids creditors from starting or continuing collection activities. 11 U.S.C Sec. 362."

What are the Advantages of Chapter 13 Bankruptcy?

Chapter 13 offers individuals several important benefits. These include:

  • Saving their home from foreclosure
  • Curing delinquent mortgage debt
  • Curing delinquent car payments
  • Rescheduling secure debts
  • Significantly reducing payments on unsecured debts. This includes credit cards, medical debt, deficiencies on car loans and department store cards.

In addition, Chapter 13 provides a special provision that protects third parties who are liable with the debtor on consumer debt. This provision may protect co-signers and loved ones who helped assist debtors establish credit worthiness to purchase secured items.

Chapter 13 bankruptcy is similar to a debt consolidation program under the protection of the federal bankruptcy court. The debtor will decide with their attorney how much they can afford to repay. Regular monthly payments are sent to a Trustee. The trustee then distributes the debtor's payments to all filed claimants and creditors.

At the end of the debt repayment time period, the debtor receives a bankruptcy discharge. Unlike Debt consolidation plans, the debtor is protected by the court against lawsuits from creditors attempting to freeze the debtor's bank account or garnish their wages. With this protection, the debtor doesn't have to worry if payments are being received by the creditors or if the appropriate amount is being paid.

Am I Eligible to File for Chapter 13 Bankruptcy?

There are two provisions for filing a Chapter 13 Bankruptcy stated in the USC Code. The first is that the person filing must have less than $336,900 in unsecured debt. In addition, they must have less than $1,010,650 in secured debt. Second, the petitioner can't have a Chapter 13 that was dismissed for any of the following reasons:

  • "Willful failure" to appear in court
  • Failure to comply with the Court
  • Voluntary dismissal after creditors asked the court to recover property that still had a lien.

How Does the Chapter 13 Filing Process Work?

The first step in filing for Chapter 13 bankruptcy is submitting a petition. The petition file must include:

  • Completed schedules of assets and liabilities
  • A schedule of current income and expenses
  • A listing of all creditors
  • Financial statements
  • Evidence for complying with the means test
  • A certificate of credit counseling
  • Proof of payment (6 months)
  • Bank statements
  • Car information
  • Mortgage information
  • Title and deeds to property
  • A tax transcript
  • Any other affidavit to certify income and expenses.

Within 30 days of filing, the debtor has to start making the proposed payents. This is true even if the plan has not yet been confirmed by the court.

The debtor also has to keep paying "post-petition" payments on all secured assets that they want to keep. (i.e. car payments and mortgages, and ordinary and necessary expenses for living; i.e. rent, utilities, etc.) The bankruptcy court is then required to hold a confirmation hearing within 45 days of meeting the creditors.

The purpose of the hearing is to decide if the proposed repayment plan meets bankruptcy standards. Within 45 days after the meeting of the creditors, the bankruptcy court must hold a confirmation hearing. This is done to decide if the debtor's repayment plan meets confirmation standards.

Confirmation standards are found in the Bankruptcy Code 11 U.S.C 1324 and 1325. If the court confirms the plan, the Chapter 13 trustee will distribute the money paid by the debtor.

What if Can't Afford to Make my Chapter 13 Bankruptcy Payments?

Tough times happen for many people, and they may not be able to keep making their planned payments. In this case, the debtor can ask the court to grant them a hardship discharge.

What is a Chapter 13 Hardship Discharge?

After confirmation of a plan, circumstances may arise that prevents the debtor from finishing the plan. In such circumstances, the debtor may ask the court to grant a hardship discharge.

There are three requirements that have to be met to ask for a hardship discharge.

  • The debtor can't make payments due to circumstances out of their control
  • Unsecured creditors were already paid the amount they would have gotten from a Chapter 7 Bankruptcy
  • Modifications to the repayment plan aren't possible

Circumstances in which a hardship discharge are possible typically have to be serious and permanent. This might mean an injury or medical condition that completely disables the debtor.

The important thing to remember is that losing a person's job isn't considered a permanent circumstance. After all, the debtor can always find another job. The same goes for a decrease in income.

What if My Circumstances Don't Allow for a Hardship Discharge?

If the debtor's circumstances are considered temporary, they do have other options. Modification will usually be the next possible solution.

A Chapter 13 payment plan modification can allow a few different options.

  • Payments can be reduced
  • An extension on making payments may be granted
  • The amount owed to a creditor may be changed, in special cases
  • The costs of health insurance can be deducted from the payment plan

If a modification isn't possible, a debtor may also request to convert to a different type of bankruptcy, such as Chapter 7.