Filing a Chapter 13 Bankruptcy: The Basics

Individuals who have an average income are able to file for Chapter 13 bankruptcy of the U.S. Bankruptcy Code. A Chapter 13 bankruptcy will allow a petitioner to keep his or her property and will also permit the petitioner to make monthly payments to lessen the debt.

Chapter 13 bankruptcy is commonly known as a wage earner’s plan. This form of bankruptcy will give debtors the ability to develop payment plans to repay most or all of the owed debt. Once a petitioner has entered into a Chapter 13 bankruptcy, he or she will need to enter into a repayment plan. This plan consists of monthly installments to the applicable creditor. These payments will need to be made over a three (3) to five (5) year period. If the debtor’s income is less than his or her domestic state’s average, the applicant’s monthly plan will be court ordered at three (3) years. The court could extend this time period under certain circumstances. If the applicant’s income is higher than his or her domestic state’s average income, the repayment plan will be set at five (5) years. The payment plan will never exceed the five (5) year period.

The Advantages of Filing for a Chapter 13 Bankruptcy

Chapter 13 offers people several benefits over the possibility of liquidation found under filing for a Chapter 7 bankruptcy. One of the greatest benefits offered by a Chapter 13 bankruptcy is the ability to save a person’s home from foreclosure. By filing for a Chapter 13 bankruptcy, a person could potentially prevent foreclosure proceedings and/or relieve the delinquent mortgage payments in time.

Chapter 13 also allows a person to reschedule a secured debt and delay payments over the life of the Chapter 13 bankruptcy plan. This will not, however, include the mortgage for the primary residence. When doing this, the petitioner can experience lower payments.

Undergoing a Chapter 13 bankruptcy can also protect third parties who are tied to the petitioner through a special provision. A common example of this form of protection is the protection of co-signers.

Ultimately, a Chapter 13 bankruptcy can act as a consolidation loan. The petitioner will make monthly installments to an assigned trustee, who will then distribute the funds to the applicable creditors. Chapter 13 debtors will not be required to have any direct contact with creditors under the chapter’s protection.

Who is Eligible to File Chapter 13 Bankruptcy?

People who are self employed or are otherwise managing an unincorporated business can file for the relief and benefits of a Chapter 13 bankruptcy. It is important to note that a corporation and/or partnerships are not eligible for a Chapter 13 bankruptcy. There are several other conditions that will play a role in a person’s ability to apply for a Chapter 13 bankruptcy. One of these conditions includes a person’s ability to sustain credit counseling from a qualified agency within a period of 180 days before the actual petition is made.

How Chapter 13 Bankruptcy Works

A petition for a Chapter 13 bankruptcy case will begin by filing all the necessary documents in the petitioner’s appropriate court. There are several documents a petitioner could be required to file. These documents include:

  • A list of the individual’s assets and/or liabilities,
  • A list of his or her income(s) and expenditures,
  • Contracts and unexpired leases that are applicable,
  • A statement of the petitioner’s financial affairs,
  • A certification of the credit counseling received, and
  • A schedule of the intended repayment plan.

The Chapter 13 Bankruptcy Plan

Unless the bankruptcy court has allowed an extension, a Chapter 13 petitioner has to file a plan for repayment along with the application or otherwise within fourteen (14) days after the petition has been filed. The repayment plan must be submitted in order to be approved by the court. Once approved, the payments will be set at fixed amounts and made readily for the appointed trustee. The trustee is then responsible for making the payments to the applicable creditors.

It is important to understand that there are three categories of claims. A claim could be labeled as a priority, a secured claim, or an unsecured claim.

  • Priority Claims
    • Priority claims are deemed so under the law. They can be most taxes and/or the costs of bankruptcy proceedings.
  • Secured Claims
    • Secured claims allow creditors the ability to take back certain property in the event that an individual fails to pay.
  • Unsecured Claims
    • Under this category, creditors do not have an authority to collect the property of a noncompliant person.

Successfully Completing a Chapter 13 Plan

Under the rule of a court, the provisions of a plan tie both the applicant and the creditor. Once the plan has been confirmed by the court, the petitioner must cooperate in making the plan succeed. The petitioner then has an obligation to make regular payments to the court-assigned trustee. While the Chapter 13 applicant is able to keep his or her property, he or she may not be able to incur additional debt without first consulting the assigned trustee. This is because the additional debt could affect the applicant’s ability to pay the debt.

There have been recent changes to the law regarding Chapter 13 bankruptcy discharge. Since the law is complex and has undergone changes, it is vital for Chapter 13 debtors to consult with an experienced bankruptcy attorney to determine what his or her next step is. A Chapter 13 discharge will not be granted by a court if it has reason to believe that there are pending proceedings.

Before filing for a Chapter 13 bankruptcy, explore all available options before making a decision. Hiring an experienced bankruptcy lawyer near you can help determine the best option for your specific case.