In 2013, approximately 300,000 Americans filed for Chapter 13 bankruptcy, about 30% of all bankruptcies.
What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcies are debtor reorganization proceedings that encourage the consumer to repay as much of the debt as possible. A regular income is required to secure a Chapter 13 repayment plan, which usually lasts three to five years.
Under Chapter 13, the bankruptcy court prohibits creditors from recovering claims before the bankruptcy proceedings begin. The court also provides protection against wage garnishments and repossessions. A court-appointed trustee oversees a strict repayment plan for the debtor. If the debtor makes all scheduled payments throughout the time period specified by the court, any debts that remain unpaid will be discharged.
A petitioner must have regular income to enter into a Chapter 13 debt repayment plan.
Chapter 13 Advantages over Chapter 7
Chapter 13 offers individuals a number of advantages over liquidation under Chapter 7. Perhaps most significantly, Chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the Chapter 13 plan on time.
Another advantage of Chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the Chapter 13 plan. Doing this may lower the payments.
Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers.
Finally, Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a Chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under Chapter 13 protection.
Eligibility for a Chapter 13 Bankruptcy
Any individual, even if self-employed or operating an unincorporated business, is eligible for Chapter 13 relief as long as the individual’s unsecured debts are less than $360,525 and secured debts are less than $1,081,500. These amounts are adjusted periodically to reflect changes in the consumer price index.
An individual cannot file under Chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.
In addition, no individual may be a debtor under Chapter 13 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an EOUST-approved credit counseling agency, like InCharge Debt Solutions, either in an individual or group briefing.
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.
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.