Filing Chapter 13 Bankruptcy
Chapter 13 allows debtors to repay all, or a significant portion, of their debts in 3-5 years under a court-ordered plan. The most common debts discharged in a Chapter 13 proceeding are medical bills, credit card debt and personal loans.
If the court accepts your repayment plan, creditors are forbidden to continue collection efforts. You also should get relief from collection agencies and their barrage of phone calls and letters.
To be clear: Chapter 13 is not what people typically think of when they think bankruptcy. It isn’t wiping the slate clean and starting all over again. Unsecured debts, like alimony, child support, student loans and taxes must be paid in full and payments on things like house and car, must be kept current during your repayment period.
Chapter 13 as a repayment plan that a bankruptcy court trustee administers. Typically, a petitioner’s attorney creates the plan that allows payment of key debts over several years. At the end of that period, unsecured debts that remain unpaid are discharged.
Success Rate for Chapter 13 Bankruptcy
Consumers should be aware that there is less than 50-50 chance filing for Chapter 13 bankruptcy will be successful, according to a study done by the American Bankruptcy Institute (ABI).
The ABI study for 2019, found that of the 283,313 cases filed under Chapter 13, only 114,624 were discharged (i.e. granted), and 168,689 were dismissed (i.e. denied). That’s a success rate of just 40.4%. People who tried representing themselves – call Pro Se filing – succeeded just 1.4% of the time.
Chapter 13 vs Chapter 7
Chapter 13 bankruptcy is often called the “wage earners” bankruptcy. A petitioner must have regular income to enter a Chapter 13 debt repayment plan. This form of bankruptcy is mostly beneficial to consumers with valuable assets and a high source of income.
Chapter 7 bankruptcy is designed for those who truly can’t afford to repay their debts. It is, by far the most common type of bankruptcy with 483,988 filings in 2019 compared to 283,413 Chapter 13 filings.
In Chapter 13 bankruptcy, you retain your assets while extending repayment of debts over a 3-5-year period. In Chapter 7, your assets are liquidated – except those that are exempt such as your house and car — and turned over to a court-appointed bankruptcy trustee, who sells them and uses the proceeds to pay off creditors. The rest of the debt is discharged.
To qualify for Chapter 7, you must earn less than the median income in your state for a family of your size. Filers who don’t pass the “means test” can look to Chapter 13 instead.
Chapter 13 Advantages:
- Chapter 13 is essentially a consolidation loan in which you make a monthly payment to a court-appointed trustee, who then distributes the money to creditors.
- Creditors are not allowed to have any direct contact with you and must go through the trustee instead.
- You can keep your property and gain time to pay off debts.
- If you fall behind on your mortgage and are in danger of foreclosure, the Chapter 13 repayment plan will help you make up those payments and save your home.
- Secured debts such as car loans – but not a mortgage for a primary residence – can be restructured and extended over the span of the Chapter 13 repayment plan. Doing this can lower the monthly payment. For example, if you have two years of payments left on your car loan, it may be extended to three years to lower the monthly payment.
- Chapter 13 also has a special provision that protects co-signers to consumer debt. The creditor may not seek to collect from the co-signer on a consumer debt, which is defined as something purchased primarily for a personal, family or household purpose.
Chapter 13 Disadvantages:
- It can take up to five years to complete the process. Chapter 7 bankruptcy usually takes 4-6 months.
- Bankruptcy will ruin your credit, and Chapter 13 stays on your credit report for seven years. It does slightly less damage than a Chapter 7 judgment, which remains for 10 years.
- All of your cash will be tied up in living expenses or debt payments for the next 3-5 years and you will find it difficult (though not impossible) to get credit.
- Declaring for Chapter 13 makes it more difficult to file for Chapter 7 in the future. You cannot declare for Chapter 7 if you have gone through Chapter 13 bankruptcy in the last six years.
Eligibility for Chapter 13 Bankruptcy
Individuals are eligible for Chapter 13 relief if their unsecured debts (credit cards, medical bills, etc.) are less than $419,275 and secured debts (home, car, property, etc.) are less than $1,257,850. Amounts change every three years based on the consumer price index and the current numbers will remain in effect until April 2022.
Only individuals or husbands and wives who file jointly, are eligible for Chapter 13 bankruptcy. Businesses aren’t eligible for Chapter 13. They must file under Chapter 11 bankruptcy or Chapter 7.
Those wishing to file for Chapter 13 must prove that they have filed state and federal income taxes for the previous four years.
You can’t file under Chapter 13, or any other chapter, if a previous bankruptcy petition was dismissed within the last 180 days because you failed to appear in court or comply with the orders of the court or if the petition was voluntarily dismissed by creditors.
Individuals must receive credit counseling from an EOUST-approved credit counseling agency, like InCharge Debt Solutions, at least 180 days prior to filing for Chapter 13. The EAOUST is the executive office for United States Trustees.
There are exceptions in emergency situations or where the U.S. Trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during required credit counseling, it must be filed with the court.
Chapter 13 Bankruptcy Process
Though it is possible to file bankruptcy yourself, the first step in the process should be to hire a bankruptcy lawyer. There are so many laws and exceptions involved that it pays to seek experienced professional help.
The attorney will handle the bankruptcy proceedings, but it is important to know that there is a $310 court fee to file for bankruptcy and another $3,500-$5,000 for attorney’s fees.
Court fees are considered priority debt along with child support, alimony and taxes. Money is allocated to priority debts first, then secured debts such as mortgages and auto loans, and finally unsecured debt like credit cards and personal loans.
Information you need on hand:
- List of creditors and the amount you owe
- The source of your income and the amount you earn
- List of property you own
- Living expenses
- Copy of most recent federal tax return
- After filing, the petitioner proposes a repayment plan in a hearing with a bankruptcy judge to determine if the plan is fair and meets the requirements.
If the plan is approved, the debtor makes routine payments to a court-appointed trustee, who distributes the money to the creditors.
Chapter 13 Bankruptcy Repayment Plan
Chapter 13 debtors create their own repayment plan, which must be written and submitted to the bankruptcy court at the outset of your case. The federal bankruptcy court provides a form for drafting a plan, or you can obtain one from a lower court in your area. The bankruptcy court must approve your plan for you to enter Chapter 13. The plan details your income, property, expenses and debts and includes a proposed payment plan.
A trustee will be assigned to review your plan, assess its compliance with bankruptcy laws, collect your payments and distribute them to creditors, and make sure all terms in your bankruptcy repayment plan are followed.
Your repayment plan will be divided into categories, which include:
- Priority Debts: These include truant alimony and child support; tax debts, including state and federal income taxes; wages, salaries and commissions you owe to employees; and contributions you might owe to an employee benefit funds. You must pay 100% of these debts.
- Secured Debts: All secured debts must be fully repaid. These include mortgage defaults and missed car-loan payments. Any missed payments must be made current.
- Unsecured Debts: These are any debts that don’t have collateral and include credit card balances, utility and medical bills, and personal loans. You plan will require you pay from nothing to 100% of these obligations. The amount you have to pay depends on such factors as the value of your nonexempt property, the amount of uncommitted income that you will have each month that could be applied to your debts and the duration of you plan.
Should I File Chapter 13 Bankruptcy?
Entering bankruptcy is a major financial decision with consequences that can impact your creditworthiness for years. Though local, state and federal government agencies can’t consider bankruptcy when deciding whether to hire you, private employers face no such restriction. Given the gravity of the decision, it pays to explore all options before filing a bankruptcy petition.
Credit counseling is a good first step. Though bankruptcy might be the only sensible alternative in some cases, others with financial problems might discover that creating a debt-management plan might help be a better solution.
InCharge Debt Solutions, a nonprofit credit-counseling and debt-management firm, offers a variety of services to help you make the best decision. If you decide that bankruptcy is the best option for you, InCharge can help you through the process. It provides approved bankruptcy education courses and offers both pre-filing and pre-discharge bankruptcy education through its PersonalFinanceEducation.com website.
When Will My Debts be Discharged?
Because Chapter 13 bankruptcies involve repayment plans that can take 3-5 years to complete, it takes four years on average to discharge remaining debts.
In a situation in which you lose your job, you can try to have your plan modified. You need to inform your trustee of your financial situation before you miss payments, otherwise you risk having your case dismissed.
If a serious injury or illness occurs while enrolled in Chapter 13, you may qualify for a hardship discharge. That’s only the case if the hardship was beyond the debtor’s control, creditors received at least as much as they would under Chapter 7 and modifying the plan isn’t possible.