Filling Chapter 13 Bankruptcy

Chapter 13 allows consumers to develop a plan that repays all, or a significant portion of their debts in a 3-5 year timespan. The most common debts discharged in a Chapter 13 proceeding are medical bills, credit card debt and personal loans.

If the court approves your repayment plan, creditors are forbidden to continue collection efforts. In other words, you 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 hear the term 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 should be seen as a repayment plan in which debts are reorganized and prioritized by a bankruptcy court trustee based on your monthly income. At the end of the repayment period, unsecured debts that remain unpaid are discharged.

Success Rate for Chapter 13 Bankruptcy

Consumers should be aware that there is only a slightly better than 50-50 chance filing for Chapter 13 bankruptcy will be a success, according to a study done by the American Bankruptcy Institute (ABI).

The 2016 ABI study found that while 166,424 cases were discharged (i.e. granted), another 164,626 were dismissed (i.e. denied). That’s a success rate of 50.2%.

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 486,542 filings in 2016, almost double the amount of 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 your 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 extend the amount of time you have 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 take from 4-6 months.
  • Bankruptcy will ruin your credit, and Chapter 13 stays on your credit report for seven years. Chapter 7 stays on for 10 years.
  • All of your cash will be tied up in living expenses or debt payments for the next three to five years and you will find it difficult (though not impossible) to get credit.
  • Declaring for Chapter 13 will make it more difficult to declare 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 as long as their unsecured debts (credit cards, medical bills, etc.) are less than $394,725 and secured debts (home, car, property, etc.) are less than $1,184,200. These amounts change periodically to reflect changes in the consumer price index.

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.

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 makes sense to have a professional helping you with this very important step in life.

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.

When Will My Debts be Discharged?

Because Chapter 13 bankruptcies involve repayment plans that can take three to five years to complete, the average discharge of remaining debts happens approximately four years after filing.

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 if the situation was beyond the debtors control, creditors have received at least as much as they would have under Chapter 7, and modifying the plan isn’t possible.