Chapter 13 Bankruptcy
Chapter 13 bankruptcy filing is a way for individuals to undergo a financial reorganization supervised by a federal Bankruptcy Court. The Bankruptcy Code anticipates the goal of a Chapter 13 case as enabling income-receiving debtors debt rehabilitation provided they fulfill a court-approved plan. Compare the goal of Chapter 13 with the relief contemplated in Chapter 7 that offers immediate, complete relief of many oppressive debt(s).
Under Chapter 13, the debtor proposes a plan to pay his creditors over a 3 to 5 year period. During this period, his creditors cannot attempt to collect on the individual's previously incurred debt except through the bankruptcy court. In general, the individual gets to keep his property, and his creditors end up with less money than they are owed.
Chapter 13 Requirements
To be eligible to be a Chapter 13 debtor, individuals must meet, among other things, the following two requirements: (i) they must have a regular income, and (ii) their debts must not exceed a certain amount. If the individual's current monthly income is less than the applicable state median income the plan will generally be set up for three years, although the court may approve a longer plan. If the debtor's current monthly income is greater than the applicable state median, the plan is generally for five years.
Disadvantages of Chapter 13
The disadvantage of filing for personal bankruptcy is that a record of this stays on the individual's credit report for 10 years. During the Chapter 13 case the debtor is not permitted to obtain additional credit without the Chapter 13 Trustee's permission. Moreover, creditors may not be willing to risk lending money to such an individual. However, this disadvantage is not unique to Chapter 13; it may also apply to individuals currently in a Chapter 11 case or those who are in or have recently been in a Chapter 7 case.
Advantages of Chapter 13
The advantages of Chapter 13 over Chapter 7 include: the ability to stop foreclosures and to have a mortgage that has been accelerated declared reinstated upon bankruptcy plan completion, to achieve a discharge of debts of kinds not dischargeable under Chapter 7, to value collateral; and in some cases; to prevent collection activities against non-filing co-signers (co-debtors) during the life of the case.
What happens under Chapter 13?
A Chapter 13 plan, is just that, a plan outlining the way the person plans on going forward with their financial future. This plan is filed with or shortly after a debtor's Chapter 13 bankruptcy petition. The plan details the treatment of debts, liens, and the secured status of assets and liabilities owned or owed by the debtor in regard to his bankruptcy petition filed in United States Bankruptcy Court. For the plan to be confirmed by the court, it must, at a minimum, meet all of the following tests:
Commit every penny of the debtor's household's disposable income to the Chapter 13 Plan for at least three years (unless a 100% repayment of all unsecured debt will occur in less than three years), or up to five years, but longer than three years only if the debtor elects it or if your are over the medium income for your state and do not other pass a means test. Provide that unsecured creditors will receive at least as much through the Chapter 13 Plan as they would in a Chapter 7 liquidation. Provide a meaningful payback to the unsecured creditors. In some districts and divisions this means as little as a one cent on the dollar payback.
What about my property?
In Chapter 13 you can usually keep your property but you must earn wages or have some other source of regular income and you must agree to pay part of your income to your creditors. You must also be able to pay your monthly living expenses, and make your payment to a Chapter 13 Trustee as well. The Court must approve your repayment plan and your budget. A trustee is appointed and will collect the payments from you, pay your creditors, and make sure you live up to the terms of your repayment plan.
Chapter 13 Bankruptcy generally permits individuals to keep all of their property by repaying creditors out of their future income. Each Chapter 13 Bankruptcy debtor files a plan of repayment, which must be approved by the Court. In a bankruptcy plan most creditors will be prohibited from collection their claims from the debtor and will receive a pro rata share of whatever the debtor contributes to the plan of repayment. The debtor makes regular payments to a Chapter 13 trustee in the amounts set forth in their plan. Under this Chapter, a debtor who has a regular income will turn over a part of the income to a trustee who will use it to pay off all or a portion of the debtor's debts over a period normally of 3 years but not exceeding five years. Debtors' receive a discharge after they compete their Chapter 13 repayment plan, and for any amount remaining the debtor is released from most liability and the debt becomes discharged.
What about my debts?
Debts that are generally consolidated in a Chapter 13 are mortgage arrears, balances on vehicle loans, student loans, credit card debts and other unsecured debts. All outstanding debts must be included in the Chapter 13 consolidation.
Unlike a Chapter 7 Bankruptcy case, a Chapter 13 Bankruptcy case may be dismissed upon request of the debtor at any time without prior notice to creditors and a hearing in Court. Creditors will be notified of such a dismissal. Some protection may be given to co-debtors.
Chapter 13 Bankruptcy is available to individuals with regular income whose debts do not exceed certain debt limits which change from time to time.
Am I eligible?
When determining a persons eligibility for a Chapter 13 all income coming in to the household must be listed. All household income must be listed without fail, even though under Utah Law a person is not responsible for the debt of another, whether married or not, unless the particular debt has been signed for. Under current bankruptcy decisions all income for the household for couples must be listed along with all expenses for the household, when determining the ability to make payments in a Chapter 13 repayment plan.
The fact that a Chapter 13 plan is filed does not mean that other person become responsible for the debts of the other but the amount of the payments necessary under the Chapter 13 repayment plan it will depend on the amount available to the household minus the entire amount of household expenses, which would include the reasonable expenses and debt service of the non filing individual.
How do payments work?
Payments must be commenced at once and must equal or exceed the amount that creditors would receive in a Chapter 7 case. Although the debtor maintains possession of his property during the administration of the case, the property is under the control of the Court. There can be no sale of property other than in the regular course of business and no obtaining of credit without obtaining an order of the Court. Reorganizations may be advantageous. Chapter 13 can be used to being delinquent payments on a home mortgage current, restructure other secured debts, and provide a payment plan to your unsecured creditors.
Why choose Chapter 13 over Chapter 7?
- Chapter 13 can stop foreclosures and repossessions. Most of our clients have gone through loss of job, divorce, or illness which has made them fall behind on their obligations with their mortgage company or car payments. Filing a Chapter 13 bankruptcy can help you keep many of these items while making a more affordable payment plan.
- Other people file Chapter 13 bankruptcy because they have too many assets. If you have excessive amounts of equity in your house, or you have assets that exceed the protected or exempt amounts, you may be able to keep the assets and pay your debts back through a Chapter 13 bankruptcy.
- Some of our clients file for Chapter 13 bankruptcy because they have too much income to qualify for a Chapter 7 bankruptcy filing.
- Finally some clients file Chapter 13 because they previously filed a Chapter 7 bankruptcy case - within the preceding eight years-and are ineligible to file another Chapter 7 case.
What Else Do I Need to Know About Chapter 13 Bankruptcy?
One very important thing to remember about Chapter 13 bankruptcy is that you must be working or have a consistent source of income for your repayment plan to be approved by the court. Not only must you be able to pay for your monthly living expenses, but you must also be able to make a payment to the court to consolidate your debts. You must continue to make your payments to the trustee over the 3-5 year period.
If payments are not made to the trustee in a timely manner, the case may be dismissed. If mortgage payments are not kept up to date, the mortgage lender may ask to be removed from the bankruptcy and attempt to collect the debt outside the bankruptcy case. Likewise, if taxes are not maintained on real property, or if insurance is not maintained on any homes or vehicles, those creditors may ask to be removed from the bankruptcy and may be allowed to collect the debt while the bankruptcy case is still open.