What is Chapter 13 Bankruptcy? 4 Things You Need to Know
We have all had times where money has felt scarce and impending payments seemed overwhelming, and bankruptcy can seem daunting. Can it provide future solvency? Let's find out.
While we can usually come out from those circumstances unscathed, there are times when we have to admit that we need help. This may be one of those times, and that is okay. The good news is, you have options!
This article will cover what Chapter 13 bankruptcy is, who should use it, and how it can help. Using this information can help you decide if Chapter 13 bankruptcy is right for you, or if there is something else you should do.
The goal of filing for Chapter 13 bankruptcy is the bankruptcy chapter to create a way to adjust and repay your debts in a more manageable format while still being protected from things like collection agencies, repossession, and can stop foreclosure immediately. One of the biggest things to consider when thinking about Chapter 13 bankruptcy is if you are still able to make regular payments on your debt. In order to do this, you need to have ‘disposable income,’ or income that is not already needed for everyday living expenses. If you do have disposable income, Chapter 13 bankruptcy may be able to help get you out from underneath that pile of debt.
Who is Eligible For Chapter 13 Bankruptcy?
Before deciding whether or not Chapter 13 bankruptcy may be right for you, make sure you meet the following criteria:
- Chapter 13 bankruptcy is only for individuals or families and can be used by sole proprietors and self employed.
- Demonstrated ability to make monthly payments (there must be proof of regular income that exceeds living expenses each month.)
- You must be current on your tax filings. You will be required to submit your tax filing documents for the previous four years. Your case will be delayed until you can produce these documents.
- Have no more than $419,275 of unsecured debt.
- Have no more than $1,257,850 of secured debt.
- Cannot have filed for Chapter 13 bankruptcy in the past two years.
- Cannot have filed for Chapter 7 bankruptcy in the past four years.
- Cannot have filed a bankruptcy petition in the previous 180 days from such things as a Chapter 13 dismissal for any reason (such as failure to appear in court, failure to comply with court orders, etc.)
- Chapter 7 bankruptcy has income limits, but you don't see those in Chapter 13 bankruptcy.
If you meet these requirements, you can consider pursuing Chapter 13 bankruptcy. If not, you will have to consider other forms of bankruptcy, like Chapter 7, or other bankruptcy alternatives.
Chapter 13 Bankruptcy Process
The process for Chapter 13 bankruptcy is relatively straightforward. The goal is to create a debt payoff plan that you can follow while maintaining your personal assets. Before you begin filing for bankruptcy, there are two things you will want to do: First, you will want to find a bankruptcy attorney who can walk you through all of these next steps. Then, you will have to attend a credit counseling course. Before filing for bankruptcy, you are required to meet with an approved professional who can help counsel you to help create sound financial habits that will help keep you out of debt and make you financially stable. This has to be done no more than 180 days before filing.
After you have completed these two steps, you will begin filing for bankruptcy. These steps are as follows:
- Fill Out the Paperwork: There is a lot of paperwork that goes into petitioning the court to declare bankruptcy. You will be disclosing all of your financial information, including what you owe, the properties you own, your tax filings, and much more. One important piece that you turn in is called the Payment Plan, which we will go over in just a minute.
- The Court Appoints a Bankruptcy Trustee: In order to make sure the plan that you submit is achievable and that you are staying on top of your payments, the court appoints a trustee to watch over your financial status throughout the time you are paying back your debts. They will also make sure that everything you do meets court standards and complies with all laws and tax codes.
- Automatic Stay: As soon as you file for bankruptcy, a stay is placed on your assets to keep them from being repossessed or foreclosed. Creditors are barred from continuing to try and collect any payments from you directly.
- Start Making Payments: Within about a month of filing, you will have to begin making payments towards your debt based on your proposed payment plan. Your plan may not have been approved at this point, but it is important to continue paying off your debt as you go through this process.
- The Meeting of the Creditors: Your bankruptcy trustee will conduct a meeting with all of your creditors in a room outside of the courtroom. The trustee will ask you many questions about your payment plan and your current finances. Creditors are also allowed to come and ask questions.
- Confirmation Hearing: This is where you will find out if your payment plan was approved. If it is approved, then you can move forward with your plan. Typically, the plan can be modified to a point of being confirmed.
- Follow Through With Payment Plan and Other Requirements: Once your payment plan is approved, you will begin making payments based on the plan. It is important that you follow through on your payment plan. If you don’t, you run the risk of defaulting on your case, being dismissed by the court, and creditors are then able to repossess and foreclose on your property. You will also need to attend personal finance management classes as required by your state.
- The Court Discharges Your Debt: Once the repayment period ends, the court will dismiss the unsecured debt you have and you are done with Chapter 13 bankruptcy.
What Goes Into My Chapter 13 Repayment Plan?
Your Chapter 13 repayment plan is one of the most important aspects of your case. In a sense, it shows if you can afford the Chapter 13 bankruptcy.
Firstly, there are resources online that can help such as a Chapter 13 monthly payment calculator.
There are three general categories of debt that will need to be outlined in your Debt Repayment Plan that you submit to the court.
- Priority: This debt comes from things like missed child support payments, alimony, back taxes, and so on. These are payments that are priorities to pay back.
- Secured Debt: Some of the most common examples of secured debts are mortgages and car loans. These are types of debts that have collateral, or something that can be taken back or resold to pay off debt.
- Unsecured Debt: This form of debt is something that does not have a collateral backing, or something that can be sold or taken back. Examples of this include medical bills, credit card balances, and more
It's important to know what you want. Too often I have seen individuals wish to convert Chapter 13 to Chapter 7 due to such things as high monthly Chapter 13 repayment plan payment.
All three will have to be accounted for on your Debt Repayment Plan. You will also have to list the following:
- Current Income
- Current Expenditures
- Statement of Financial Affairs
- Any Contracts or Lease Agreements
- All Assets and Liabilities
When all of this is turned in, you will work with your bankruptcy attorney and bankruptcy trustee to create a Debt Repayment Plan to work towards paying off your debt. This is what will either be approved or amended in your Creditor’s Meeting and Confirmation Hearing.
I know it can be scary thinking about filing for bankruptcy, but don’t let that feeling stop you from taking a step toward financial stability. You can check out the bankruptcy pros and cons or speak with a bankruptcy attorney to help you understand whether Chapter 13 bankruptcy is right for you.