Chapter 13 bankruptcy grants legal protections when you are unable to repay creditors in full. The code provides an immediate stay on court actions to collect debts such as wage garnishments or foreclosure proceedings. You also gain time to catch up on bills and make partial payments on unsecured debts before any discharge occurs.
- Chapter 13 bankruptcy is best suited for those who do not qualify for Chapter 7 Bankruptcy and earn enough to make partial payments on outstanding debts.
- Filing a Chapter 13 bankruptcy petition stops legal proceedings, such as a foreclosure or wage garnishments.
- The discharge of qualified debts occurs after the completion of the five-year repayment plan.
- The US Bankruptcy Court oversees the process.
Overview of Chapter 13 Bankruptcy
Often called the wage earners bankruptcy, Chapter 13 Bankruptcy can provide a soft landing. Instead of liquidating assets and discharging debts immediately, you have more time to satisfy late payments, restructure debt, and pay your creditors with the protections provided by the bankruptcy courts.
Under Chapter 13, filing a petition will immediately stop creditor collections and court proceedings. You must propose a repayment plan that uses all discretionary income to bring payments current on certain debts and allows for partial repayments on others. Creditors can scrutinize your proposal at the creditors’ meeting before a judge reviews and approves the repayment plan.
Prepare to make payments for three to five years before receiving forgiveness of any remaining qualified debts, and be aware that a notation of the bankruptcy filing will remain on your credit report for seven years and you will not be able to apply for new credit until your debt have been fully discharged. Even after the discharge of your debts, it will be extremely difficult to obtain new credit until the notation of your Chapter 13 Bankruptcy filing drops off your credit report.
Chapter 13 Bankruptcy Versus Chapter 7 Bankruptcy
Filing either Chapter 7 or Chapter 13 bankruptcy will stop collection efforts, legal proceedings, and end court orders such as wage garnishments. That is where the similarities end.
Chapter 7 liquidates non-exempt assets to repay creditors and then discharges debts within a few months. The bankruptcy code requires filers to meet an income means test, excluding many people from filing Chapter 7. You also risk losing your home, car, and other assets if you file for bankruptcy under chapter 7.
Chapter 13 does not have the same income means test restrictions as Chapter 7 and has the distinct benefit of protecting certain types of property. Through the chapter 13 bankruptcy process, you must bring accounts current and make regular payments as they come due to preserving your property. It is also possible to restructure debt for the term of the bankruptcy payment schedule, which could lower payments on debt secured by assets like vehicle loans.
The Pros and Cons of Chapter 13 Bankruptcy
The Benefits of Chapter 13
The primary benefits of filing Chapter 13 include:
- You may keep property such as your home or vehicle
- You may restructure secured loans and pay over the term of your Chapter 13 repayment plan
- It protects account owners and co-borrowers from collection efforts
- It eliminates direct contact with your creditors and stops collection efforts, wage garnishments, and legal actions to collect debts.
- A negative mark remains on your credit for seven years (ten years for Chapter 7).
The Drawbacks of Chapter 13
The primary drawbacks to filing Chapter 13 Bankruptcy include:
- It takes three to five years to qualify for a discharge.
- You must use ALL your disposable income to repay creditors for the term of the plan.
- It will ruin your credit and make it extremely difficult to obtain new credit for at least 7 years.
- You must attest to filing bankruptcy in applications for new credit indefinitely.
- All your credit accounts will be closed, except loans secured by assets you choose to keep.
- It is much harder to qualify for Chapter 7 after filing for Chapter 13 Bankruptcy.
- Chapter 13 Bankruptcy does not discharge all debts.
- The court, through a bankruptcy trustee, oversees your finances and spending for the term of your repayment plan.
Who is Eligible for Chapter 13?
The bankruptcy court divides debts into two categories: secured and unsecured. Secured debts include any loans that give the creditor the right to take the asset if you fall behind on payments. A home, vehicle, or boat are typical assets secured by a loan. Unsecured debts are not secured by an asset. Examples of unsecured debts include credit card bills, medical debt, payday loans, and personal loans.
Individuals with unsecured debts under $419,175 and secured debts under $1,237,850 may qualify for Chapter 13 Bankruptcy. The statute also allows unincorporated businesses and self-employed individuals to file under Chapter 13, although corporations and partnerships cannot. However, you may qualify to include business debts you personally guaranteed.
The Process of Filing Chapter 13
You first file a Chapter 13 Bankruptcy petition with the clerk of court and pay the required filing fees. In addition to the petition, you must submit the following information:
- A list of all assets
- A list of all liabilities or debts
- A list of all sources of income
- A detailed list of monthly expenses
- A list of contracts and unexpired leases
- A current financial statement
- A certificate of pre-bankruptcy course completion from an approved credit counseling agency
- A copy of the proposed debt repayment plan
- Copies of tax returns submitted annually
Upon filing, the court grants an automatic stay of any legal proceedings, which stops collection efforts and will pause any legal proceedings, including a repossession or foreclosure. It will also end wage garnishments or account seizures.
After reviewing your proposed repayment plan, the trustee will hold a meeting with creditors, which you must attend. Creditors may ask questions about your finances, your ability to repay or challenge the proposal. The trustee then presents the plan to a judge who reviews the request before the program takes effect. Once approved, you pay the trustee, who distributes the funds to creditors.
Non-priority claims, including unsecured debts such as credit card bills or personal loans, often receive partial payment of the amount owed based on your disposable income.
Plan payments must begin to the trustee within 30 days of filing Chapter 13, regardless of whether a judge has approved the repayment plan.
How Much Does It Cost to File Chapter 13 Bankruptcy?
Courts charge a $235 filing fee plus a miscellaneous administrative fee of $75, which you must pay at the time you file. In some cases, you can qualify for installments with the first payment occurring within 120 days and the last amount no later than 180 days after filing the petition.
You can expect to pay between $2,500 and $3,500 in attorney fees, according to lawyers.com. Costs vary based on your home state and the complexity of your case. Trying to represent yourself could prove costly because only 1.4% of self-filers get debt successfully discharged.
Do You Need to Include Your Spouses Financials If You File as an Individual?
Married individuals must submit spousal information, whether you file an individual or a joint bankruptcy petition.
The Chapter 13 Repayment Plan
Who Oversees the Chapter 13 Bankruptcy Process?
The courts appoint a bankruptcy trustee who will evaluate your financial circumstances and make decisions regarding your case. The trustee must approve the repayment schedule and will direct payments to creditors according to the plan. They also must authorize any new debt obtained while in bankruptcy.
How Much Will You Have to Pay Creditors under a Chapter 13 Bankruptcy Repayment Plan?
The courts divide debt into three basic categories:
Priority claims include debt obligations you must pay in full and include court costs, attorney fees, tax obligations, child support, and alimony.
The secured debt must be fully paid if you want to keep the asset. Long term contracts like mortgages can extend beyond the term of the bankruptcy repayment plan. Filing for Chapter 13 Bankruptcy gives you time to bring accounts current while making payments on the loan.
Non-priority claims include unsecured debts such as credit cards and personal loans. These debts receive partial payments based on disposable income. The bankruptcy code requires you to apply 100% of your disposable income for the duration of your repayment term towards debt repayment. The court views disposable income as total income (excluding child support payments) minus reasonable costs required to support the debtor up to 15% of gross income.
At the end of the payment commitment, a judge will discharge the remaining balances on qualified debt.
Can You Keep Your Property When Filing for Chapter 13 Bankruptcy Protection?
When you file for bankruptcy, the law allows you to keep certain assets to help you get a fresh start after completing the bankruptcy process. The bankruptcy code defines assets as either exempt or non-exempt. You can maintain all exempt assets. If you want an asset, you must pay the value of any portion of the property not covered by the exemption. This process ensures creditors never receive less in Chapter 13 than they would in Chapter 7.
Owning a significant amount of non-exempt property could become a barrier in Chapter 13.
What Are Exempt and Nonexempt Property?
Exempt property differs at the federal and state levels. Federal exemptions include the following:
- Real estate up to $25,150.
- A vehicle up to $4,000 in value
- Household goods up to $13,400
- Jewelry up to $1,700
- Healthcare aids
- Wrongful death or personal injury settlements with limitations
- Tax-exempt retirement accounts
- Public assistance benefits
- Tools needed for your employment
- Alimony and child support
- The accumulated cash value of life insurance policies
- The wildcard that you can use to protect an asset of your choice
State exemptions vary. Depending on your residence, you may need to use federal or state exemptions. In some cases, you can choose the one that provides the highest benefit.
How Long Will You Need to Make Payments on Your Debts?
Chapter 13 provides two repayment schedules based on your income and household size. If you earn below the median income in your state, you will repay over three years. If household income falls above the median income, you must make payments for five years before receiving a discharge. For all practical purposes, everyone filing Chapter 13 will make payments for five years because anyone with income below the state median for your household size qualifies for Chapter 7.
The exception is when you qualify for Chapter 7 but choose to file Chapter 13 to protect assets or need additional time to catch up on delinquent child support payments without facing a wage garnishment. IF you qualify for the three-year repayment plan period, you can opt for the five-year plan to lower the monthly payments.
What Happens if You Cannot Complete the Chapter 13 Bankruptcy Repayment Plan?
Once the judge approves the repayment plan, it becomes binding to both the debtor (you) and your creditors. In most cases, you make payments through a payroll deduction. The courts can adjust your amount to account for the cost of living increases each year. You cannot incur any new debt while under bankruptcy supervision.
If you face a reduction in your income, you might qualify for a plan modification. Failing to make payments, file tax returns, or pay court-ordered child support, could lead to a dismissal of your case.
Hardship Discharge
A change in financial circumstances could also qualify you for a hardship discharge, however, you must prove the following:
- Your inability to complete the plan is due to circumstances beyond your control and through no fault of your own.
- The creditors received as much as they would have received in Chapter 7 liquidation.
- It is not possible to modify the pan. For example, becoming permanently disabled could prevent you from replacing lost employment.
In the event of a hardship discharge, only debts that qualify for release in Chapter 7 are included.
The Discharge Process
Once you complete all required payments, you qualify for a discharge of any remaining qualified debts. In addition to plan completion, you must also be:
- Current on child support payments
- Not received a discharge in a prior bankruptcy filing within the last two years
- Completed the required financial education course from a HUD-approved agency and
- You must attend a final hearing where the judge approves the discharge.
Once discharged, you are no longer legally responsible for any debt included in the bankruptcy. Creditors may not initiate collection efforts or sell the debt obligation.
What Debts Will the Courts Discharge in Chapter 13 Bankruptcy?
You can eliminate most unsecured debts through bankruptcy. Credit cards, medical debts, and personal loans are the primary bills that qualify for a bankruptcy discharge.
Debts that are NOT discharged in a Chapter 13 Bankruptcy
The following debts do not qualify for a discharge in Chapter 13:
- Long term secured debts such as a mortgage (assuming you keep the asset)
- Alimony or child support payments
- Delinquent taxes
- Educational loans
- Judgments from personal injury lawsuits
- Debts owed due to criminal restitution
- Property obtained under false pretenses
- Debts as a result of fraud
- Debts for willful and malicious injury to a person
Should You File Chapter 13 Bankruptcy?
Chapter 13 is best suited if you have a steady income but are behind on debts that secure assets, and you want to keep those assets. It can also help you catch up on payments on your mortgage, child support, or other non-dischargeable debts.
