what does bankruptcy chapter 13 mean

All You Need to Know about Chapter 13 Bankruptcy

What is Bankruptcy?

When debts continue to increase beyond your ability to repay them, you can file for bankruptcy to erase, or at least lessen, your debt. It should be considered as a last alternative, to be explored only after all other options for getting back on track have been explored.

Individuals who file for bankruptcy usually do so under Chapter 7 or Chapter 13. The most significant distinction between the two is what happens to your estate:

What does bankruptcy Chapter 13 mean? A wage earner’s plan is another name for a Chapter 13 bankruptcy. It enables people with a regular income to create a debt repayment plan to return all or a portion of their obligations. Chapter 13 allows debtors to offer a repayment schedule to creditors in increments over three to five years under such a chapter. If the debtor’s present monthly income is less than the relevant statutory median, the Chapter 13 repayment plan can last three years unless the court grants an extension “with cause.”

If the debtor’s present monthly income exceeds the relevant statutory median, the plan should normally last five years. A repayment plan may not provide for payments to be made over a term of more than five years. The debtor must also collaborate with a bankruptcy trustee, who distributes payments to creditors. Under Chapter 13, the debtor is not allowed to have any direct contact with his or her creditors. If the provisions of the contract are followed, all creditors are obligated by law to discontinue any efforts to collect the debts protected by the Chapter 13 procedure.

Chapter 7 bankruptcy, often known as liquidation bankruptcy, entails selling part or even all of your assets in order to pay off your liabilities. If you don’t own a property and have a limited income, this is generally the best option. Due to various federal and provincial exclusions, some of the items within your estate may be excluded from sale when you file Chapter 7 bankruptcy, depending on where you live and your marital status. Exclusions, whether they are from your personal savings, retirement funds, or even personal belongings like jewelry, enable you to get the allowable exemption amounts while the remainder of the earnings is used to pay back your creditors.

Who Should File Chapter 13 Bankruptcy?

Many people consider bankruptcy court to be the last turn on the road to financial disaster; the only choice left when settling debts appears hopeless. Even in bankruptcy, there is a possibility of losing it all, but Chapter 13 of the federal bankruptcy statute provides the nearest approximation to a gentle arrival.

Chapter 13 bankruptcy permits individuals with enough income to settle all or part of their liabilities as an alternative to liquidation. It is bankruptcy for those whose main issue is coping with creditors’ requests for instant payment, rather than the lack of money.

People who file for Chapter 13 bankruptcy have three to five years to pay off their debts while devoting all of their discretionary income to debt repayment. Applicants can use this option to pay off unsecured debts while also catching up on missing mortgage payments. Among the most appealing aspects of the alternative is the ability to avoid home foreclosure. While keeping your house can be a huge blessing, you must spend years living under the control of a court-appointed trustee who collects and distributes your funds.

How Does Filing Bankruptcy Impact Credit?

Since high balances and missed payments are the two most important factors influencing your credit score, your credit may be in poor shape by the day you explore filing for bankruptcy. Nonetheless, the existence of a bankruptcy on your credit history would have a negative influence on your credit scores and creditworthiness for the duration of the bankruptcy. Nevertheless, the impact should reduce over time. Chapter 7 bankruptcy can be on your record for up to 10 years, while Chapter 13 can last on your record for up to seven years.

Of course, this is not an ideal credit scenario, but you may use the opportunity to carefully handle your debts and ensure accurate, on-time repayments to your creditors.

The Chapter 13 Process

First, you should locate a bankruptcy attorney who can offer you a free review and filing estimate.

The expenditure of filing for Chapter 13 bankruptcy includes filing costs as well as expenses charged by a bankruptcy lawyer. Plaintiffs (or “debtors”) must pay a filing fee of $313 to the bankruptcy court. They must provide:

  • A list of creditors and the amounts owed to them
  • The amounts and sources of the debtor’s income must be disclosed.
  • A list of the debtor’s property, as well as an accounting of all contracts and leases, entered into in the debtor’s name.
  • The debtor’s monthly living expenditures are broken down.
  • Tax information, such as a copy of the debtor’s most current federal tax return, and a list of any outstanding taxes.

Chapter 13 applicants must state that they have not had a bankruptcy case dismissed due to their failure to appear before a judge in the 180 days before a bankruptcy filing. In addition, anybody filing for bankruptcy must get credit counseling from an authorized service within 180 days after filing an application.

The debtor must present a repayment plan soon after declaring bankruptcy. A hearing would be held before a bankruptcy judge or administrator to assess if the plan fits the standards of the bankruptcy law and is equitable. Creditors may oppose the scheme, but the court has the ultimate authority.

Debtors can agree to make up late payments each month, but under Chapter 13 guidelines, all new mortgage payments must be paid on time starting with the filing date. The debtor should also collaborate with a trustee, who allocates payments to creditors.

You must adhere to the fundamentals of your Chapter 13 plan. If you make late payments, or miss them, the trustee may file a motion to terminate your case. You may be able to increase your monthly payment and request an early release from the contract in specific situations.

If your financial condition deteriorates, it is your responsibility to notify the bankruptcy trustee and, if required, seek a change of the proposal. Inability to abide by the terms, particularly failure to make timely payments, may result in the dismissal of your case.

What Are the Eligibility Rules for Bankruptcy?

The primary difference for eligibility is determined by your income. Chapter 7 requires you to either have a lower-than-median income in your jurisdiction or to undergo a means test to establish if you can fairly be anticipated to repay your obligations with your disposable income (the money you have leftover after paying for your necessities).

If you are not eligible for Chapter 7, you would have to consider Chapter 13. You would need a steady income, unsecured debts below $419,275, and secured debts totaling no more than $1,257,850 to choose this option.

How Do I Apply for Bankruptcy?

The uncomfortable truth of bankruptcy is that it would cost money—even more, if you engage legal counsel, which you should do. All filings must go through the United States bankruptcy courts, where the filing fee is $335 for Chapter 7 and $310 for Chapter 13. You may, however, request that the court waive your charge or allow you to pay in monthly installments. If you file on your own, you should have to also undergo debtor education classes.

That’s only the start. There is a list of paperwork that you must complete, as well as the precise repayment plan you must submit under Chapter 13. A court-appointed trustee reviews your repayment plan and notifies your creditors before accepting it. Overall, neither filing is simple to handle yourself, and even tiny errors on your part could jeopardize your position.

Therefore, whether you file for Chapter 7 or Chapter 13 bankruptcy, it’s advisable to employ a lawyer to assist you with your case. The cost of a bankruptcy attorney is determined by the nature and severity of your case, with Chapter 13 filings being the most expensive, but the cost does not necessarily rule out hiring an attorney. To cover your options when it relates to bankruptcy, talk to potential lawyers about payment arrangements, look into local pro-bono lawyers and legal aid organizations, or use an internet tool like Upsolve.

Chapter 13 Repayment Plan

The Chapter 13 repayment plan is a document that, once accepted by the bankruptcy court, outlines the amounts that the debtor would then pay to the Chapter 13 bankruptcy trustee on a monthly or weekly basis. The repayment plan also includes how the trustee would allocate those payments to the debtor’s creditors over the proposal’s timeframe.

Priority Creditors

Priority creditors are those that hold specific sorts of priority claims, which must be fully paid as part of the repayment plan. Among these debts are:

  • certain forms of taxes
  • spousal maintenance (alimony)
  • maintenance responsibilities
  • bankruptcy fees

Secured Creditors

Secured creditors are those whose debt is backed up by collateral. A unit of asset that the creditor can recover if the debtor defaults on the loan is referred to as collateral. Mortgages and vehicle loans are common instances of secured loans.

Unsecured Creditors

Unsecured creditors are those debts that are not categorized as a priority and are not accompanied by collateral.

Which Is Better: Chapter 7 or Chapter 13?

The type of bankruptcy that is suitable for you is determined by your financial condition and aims.

Consult with a bankruptcy professional to evaluate whether Chapter 7 or Chapter 13 bankruptcy is right for you. You want to be certain that your problematic debts are manageable through bankruptcy and that you are in a position to take advantage of the clean slate that bankruptcy provides.

The majority of consumers choose Chapter 7 bankruptcy, which is quicker and less expensive than Chapter 13. The great majority of filers qualify for Chapter 7 after completing the means test, which looks at incomes, expenditures, and family size to establish eligibility. Credit card bills, hospital bills, and unsecured loans are all eligible debts that can be discharged or erased in Chapter 7. Other debts, such as school loans and taxes, are often ineligible.

Furthermore, Chapter 7 does not provide a way to catch up on secured loan payments, such as a mortgage or car loan, and it does not safeguard such possessions against foreclosure or repossession. However, if the price of your car loan exceeds the value of the vehicle (which is not unusual given how quickly cars depreciate), you may be able to reduce the amount of your monthly payment in Chapter 13 bankruptcy, this is called a cramdown.

In rare cases, a bankruptcy trustee may sell nonexempt property, which are items that are not safeguarded during bankruptcy. Items that are not exempt vary according to state legislation.

Chapter 13 bankruptcy may be preferable for debtors who are not eligible for Chapter 7 bankruptcy, such as if their income is too high. Some people who qualify for Chapter 7 may nonetheless choose to apply for Chapter 13 in order to save some property or catch up on loan repayments. However, a Chapter 13 repayment plan is difficult: After certain exemptions, all disposable income must be dedicated towards debt repayment over a three to five-year period.

How Would Bankruptcy Affect My Child Support Obligations?

Most creditors would be unable to recover debts from you if you file for bankruptcy. Once the automatic stay is in place, a creditor must get a court order before proceeding with or commencing a collection action. However, the automatic stay does not apply to the majority of child support processes, including:

  • legal action to create or alter a child support order
  • collection of child support from non-bankruptcy estate assets or
  • income deductions to pay child support under an administrative, court order, or legislation

What Is a Chapter 13 Debt Discharge?

A Chapter 13 debt discharge is a court judgment that relieves the debtor of all dischargeable debts. You are not required to repay debts that have been discharged. Creditors are also barred from attempting to recover debts after the lawsuit has been resolved.

How Do You Get a Chapter 13 Debt Discharge?

You must finish the payments indicated in your repayment plan if you qualified for Chapter 13 bankruptcy. Furthermore, before you can be discharged, you must adhere to the following:

  • Attest that you have met all of your domestic support obligations.
  • Take a financial management course.
  • Demonstrate that you have not obtained a Chapter 13 bankruptcy discharge in the last two years.
  • Before issuing a discharge, the court would first determine if there is a current process that could result in a restriction on your homestead exemption.

How Much Do You Pay Back in Chapter 13?

In Chapter 13, you pay your unsecured creditors an amount ranging from 0% to 100% of what you owe them. The precise cost is determined by the following rules:

(1) The minimum payment is equivalent to the amount your unsecured creditors would have gotten if you had qualified for Chapter 7 bankruptcy. This amount is mostly determined by how much of your estate is exempt.

(2) You must also devote all of your available funds to your repayment plan. This could imply paying your unsecured creditors more than they would have obtained if you had applied for Chapter 7 bankruptcy. The law of bankruptcy has established formulae for assessing your disposable income.

What Happens After You File Chapter 13?

Individuals may use a Chapter 13 action to avoid foreclosure on their home. The repossession procedure is halted by the automatic stay as soon as the individual submits the Chapter 13 application. The individual can then bring the past-due payments up to date over a reasonable timeframe. Nonetheless, if the mortgage company finalizes the foreclosure sale under state statute before the debtor files the application, the debtor could still lose his home. If the debtor fails to make the monthly loan repayments that become due after the Chapter 13 filing, the debtor may end up losing his home.

The Chapter 13 trustee must conduct a meeting of creditors between 21 and 50 days after the debtor files the Chapter 13 application. If the trustee or bankruptcy administrator arranges the meeting in a location that does not have regular U.S. trustee or bankruptcy administrator personnel, the meeting must take place no later than 60 days after the debtor files. During this meeting, the trustee administers an oath to the debtor, and both the trustee and creditors may pose questions. The debtor is required to attend the session and respond to questions about his or her financial situation as well as the suggested parameters of the plan.

Concerns with the plan are usually resolved during or shortly after the creditors’ meeting. In general, the debtor can prevent complications by ensuring that the application and plan are thorough and precise, as well as speaking with the trustee before the meeting.

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