Chapter 13 Information

A Little More Detail about Chapter 13 Bankruptcies

If you have a job or some source of regular income, but are overwhelmed by debts you can’t handle, Chapter 13 bankruptcy may be right for you. If you are behind on your mortgage, and the bank has or is about to start a foreclosure procedure against you, but you would like to keep your house, you may be able to do this with a chapter 13 bankruptcy. You can use Chapter 13 bankruptcy to liquidate many of your debts, set up a reasonable debt repayment plan, and get a fresh financial start.

Not all debtors qualify for Chapter 13 bankruptcy

A Chapter 13 bankruptcy is not for everyone. You may qualify for a Chapter 13 bankruptcy only if you meet the following three requirements:

  • You must have a regular source of income. The bankruptcy law requires that your income be “stable and regular” if you wish to file a Chapter 13, since you must be able to meet the terms of your repayment plan.
  • You must have enough disposable income. The law requires you not only to have a “regular” source of income, but also to have sufficient “disposable income.” In other words, you must have income left over after your allowable expenses for your basic needs each month to allow you to make monthly payments under your repayment plan. There is no set formula for determining how much income is enough, and the courts are flexible in determining this. Courts will require you to submit a proposed budget to see if you can satisfy these requirements.
  • Your debts cannot exceed a certain amount. If your secured debts (which include loans you have secured by liens on your property, such as your home and auto loans, and even IRS tax liens) exceed $1,010,650, you are not eligible for a Chapter 13 bankruptcy. Also, your unsecured debts may not exceed $336,900.00 (unsecured debts are debts for which you have not pledged any of your property as collateral-such as most credit card debt, personal loans, medical bills and utility bills.)

If you don’t qualify for a Chapter 13 bankruptcy, don’t worry; you’ll probably be able to qualify for Chapter 7 bankruptcy.

The Chapter 13 Plan

In each Chapter 13 bankruptcy, the debtor files a plan that sets forth the terms and conditions upon which the debtor will repay some or all of his or her outstanding debts. The vast majority of Chapter 13 bankruptcies provide for partial payment rather than payment in full. Depending upon the circumstances, the Chapter 13 plan will specify a repayment period of from 36 months to 60 months.

Your repayment plan is an agreement between you and your creditors. Your creditors agree to forgive a portion of your debts to them in exchange for your commitment to repay your reduced debts over time. Most plans require you to make monthly payments to the bankruptcy trustee. The trustee will make distributions to your creditors. Typically, your repayment plan will last from three to five years, but cannot exceed five years. While you are making payments under a repayment plan, the creditors listed in your plan cannot take any collection actions against you, and they are required by law to abide by the terms of your repayment plan. Once you have successfully completed your repayment plan, and complied with all other debtor duties, the court will grant you a discharge.

The Benefits of Chapter 13 Bankruptcy

Of course, you will need to work closely with your bankruptcy attorney to determine whether a Chapter 13 or Chapter 7 bankruptcy is best for you. This will depend on a number of factors, such as your income, your expenses, and the nature of your debts. However, in general, a Chapter 13 bankruptcy case will be better (or the only option) for you than a Chapter 7 bankruptcy if:

  • You are behind in your payments for property that you want to keep after bankruptcy. For example, if you are late on your mortgage or automobile loan, and you want to get current with these payments and keep your property, you can do this under a Chapter 13 repayment plan.
  • You have tax debts. It is very difficult to discharge your tax debts in Chapter 7 bankruptcy. Furthermore, even if you are able to discharge some tax debts through Chapter 7, if the IRS has any recorded tax liens against you, these liens will survive your bankruptcy. Accordingly, if a large percentage of your debt involves unpaid federal taxes, and you have the ability to repay them over time, a Chapter 13 bankruptcy may be a better alternative for you than a Chapter 7.
  • If you have nonexempt property you wish to keep. If you have a lot of nonexempt property–property which you would have to give up to your creditors were you to file bankruptcy under Chapter 7–Chapter 13 may allow you to keep this property.
  • If you have received a Chapter 7 discharge within the last eight years, but still need bankruptcy relief, then chapter 13 filing may be your only option.
  • To protect co-signers on your debts. If you had your spouse or parent co-sign on an auto or other personal loan for you prior to your bankruptcy, a Chapter 7 won’t protect your co-signer, and your creditor could go after your family member for the full amount of your debt. If, instead, you file under Chapter 13, your co-signer will be fully protected from your creditors as long as you make your payments under your repayment plan.
  • Consolidate your student loans. Although you can’t discharge your student loans in a Chapter 7 bankruptcy, you can include them in your Chapter 13 repayment plan and repay them over time.