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Chapter 13 Bankruptcy

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Chapter 13 bankruptcy is for individuals who have a regular source of income but are presently unable to pay their debts. Unlike Chapter 7 bankruptcy, in which non-exempt assets may be sold to pay off debt, Chapter 13 debtors "catch up" on their outstanding payments over an extended period of time (generally three to five years) so that they can keep their property.

Chapter 13 is most often used by individuals who have fallen behind on mortgage and/or car payments. Other good candidates include individuals who have valuable non-exempt assets they wish to keep, individuals who have debt (e.g., certain tax debts) that cannot be discharged in other bankruptcy proceedings and/or individuals wishing to protect co-signers of consumer debt. Consult a bankruptcy attorney to assess whether Chapter 13 is right for you.


 

Chapter 13 Eligibility

Hardship Discharge

If a Chapter 13 debtor is unable to make plan payments, the case is often dismissed or converted to Chapter 7. However, if all of the following criteria are met, the debtor may qualify for a hardship discharge in Chapter 13:

  • Debtor's failure to complete plan payments is due to circumstances beyond the debtor's control and through no fault of the debtor (e.g., illness)
  • Creditors have received at least as much as they would have received in a Chapter 7 liquidation case
  • Modification of the plan is not possible

If you are concerned about your ability to make plan payments, it is important to speak with an experienced bankruptcy attorney about your options.

Chapter 13 is for individuals only, including individuals with debt relating to an unincorporated business or from self-employment. Married couples may file jointly, or one or both spouses can file independently. In order to initiate a Chapter 13 proceeding, the debtor must have completed credit counseling within the six months prior to filing a petition with the U.S. Bankruptcy Court. There is a $235 case filing fee and a $39 miscellaneous administrative fee due with the petition. Additional requirements for Chapter 13 include:

  • Unsecured debts less than $336,900 and secured debts less than $1,010,650
  • Regular income that is greater than your (allowable) expenses
  • Current on income tax filings
  • No bankruptcy dismissals in the past six months for failing to comply with a court order or voluntary dismissal after creditors sought relief from the automatic stay (see sidebar).

A bankruptcy attorney can help determine whether you are eligible to file for bankruptcy protection under Chapter 13.

Chapter 13 Repayment Plan

At the heart of a Chapter 13 proceeding is the debtor's repayment plan. The plan must detail the type(s) of debt, how much will be repaid and how long the payments will last. The debtor must utilize all "disposable income" over the plan term. Disposable income is defined by The United States Bankruptcy Code as "income (other than child support payments received by the debtor) less amounts reasonably necessary for the maintenance or support of the debtor or dependents and less charitable contributions up to 15 percent of the debtor's gross income."

How Much Debt Must Be Repaid? As long as the debtor uses all "disposable income" over the plan term, it is all right if certain claims are not able to be paid in full. Generally, there are three types of claims involved in a Chapter 13 case:

  • Priority claims include taxes, bankruptcy costs and domestic support. These claims must be paid in full over the life of the plan unless the creditor agrees otherwise. If domestic support cannot be paid in full, the debtor must agree to contribute all of his or her disposable income over a five-year plan.
  • Secured claims are claims in which the creditor has the right to take back the collateral (i.e., property pledged as security for the underlying debt) if the debtor fails to make the payments. Generally, if the debtor wishes to keep the collateral, the plan must provide for the creditor to receive at least the value of the collateral.
  • Holders of unsecured claims don't have any security backing their claims. Unsecured creditors are only guaranteed to receive as much as they would in Chapter 7 liquidation. If the debtor relinquishes all disposable income over the plan period, the claims do not need to be paid in full.

The Co-Debtor Stay

Filing a bankruptcy petition invokes the "automatic stay," which prevents creditors from initiating or continuing collection actions against a debtor for the duration of the bankruptcy proceeding. The "co-debtor stay," a unique feature of Chapter 13, also prevents creditors from taking action against co-debtors (such as a non-filing spouse) of consumer debts. However, under certain circumstances the creditor may ask the court for permission to pursue the co-debtor. If you have or are a co-debtor of consumer debt, speak to a bankruptcy attorney to learn more about the protection of the co-debtor stay.

How Long Do the Payments Last? The length of the repayment plan is generally three to five years, depending on the debtor's "current monthly income" (debtor's average income over the six months prior to filing). If current monthly income is below the median household income in the debtor's state, the debtor can propose a three-year plan. If current monthly income exceeds the debtor state's median household income, the payments must continue for a five-year period.

The disposition of debt through a Chapter 13 repayment plan may involve complicated legal analysis; therefore, it is especially important to consider having an attorney help you if you are considering this form of bankruptcy. (To learn about other types of bankruptcy, such as Chapter 11 Bankruptcy , as well as other important bankruptcy-related topics like the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), visit our articles devoted to these topics.)

Chapter 13 Discharge

A bankruptcy discharge permanently bars creditors from any further attempt to collect the debts discharged in the bankruptcy. Unsecured debts such as credit card debts, medical expenses, certain tax liabilities and loans may be discharged in both Chapter 7 and 13. A Chapter 13 discharge is referred to as a "superdischarge" because there are additional debts that are dischargeable in Chapter 13 only, including:

  • Willful and malicious injury to property (but not people)
  • Debts incurred to pay non dischargeable tax obligations
  • Debts arising from property settlements in divorce or separation proceedings

The following debts are not dischargeable in Chapter 13:

  • Certain long-term obligations (such as a home mortgage)
  • Alimony or child support
  • Certain taxes
  • Debts for most government-funded or guaranteed educational loans or benefit overpayments
  • Debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs
  • Debts for restitution or a criminal fine included in a sentence on the debtor's conviction of a crime

If a Chapter 13 debtor successfully completes the repayment plan, the debts will be discharged. If the debtor fails to complete the repayment plan and/or keep current with tax filings, support obligations and certain other payments, the plan may be modified, or the case may be dismissed or converted to a Chapter 7 proceeding. Debtors who qualify for a hardship discharge (see sidebar) are an exception to this.

Bankruptcy Attorney

If you are in financial trouble, it is important to speak to an attorney as soon as possible, especially if your home is in danger. While Chapter 13 is often used to stop a foreclosure, you may not be able to reclaim your home if it is sold before your bankruptcy petition is filed.



Did You Know?

Chapter 13 plan payments can be made via payroll deductions.