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Chapter 13 bankruptcy - Pay off your debts in a timely manner

Chapter 13 of the Title 11 of the United States Bankruptcy Code governs a certain form of bankruptcy that allows debtors undergo a financial rehabilitation directed by a federal bankruptcy court. The aim of a Chapter 13 bankruptcy plan is to prepare a court-approved debt repayment plan for those individuals who have sufficient income and can repay some or all of their debts over a period of time. It is a typical form of debt consolidation.

Table of contents

Advantages of Chapter 13 bankruptcy

Chapter 13 has a number of benefits over liquidation. Here are some of the major advantages of filing for Chapter 13 bankruptcy:

  1. Opportunity to save your home: By filing Chapter 13 you get the opportunity to save your home. Filing under this chapter enables you to stop foreclosure proceedings. This might help you cure delinquent mortgage payments over time.
  2. Rescheduling of secured debts: This is another great advantage associated with Chapter 13 bankruptcy. You can reschedule your debts here. Rescheduling essentially pertains to secured debts, except for the mortgage of the primary residence.
  3. No direct contact with creditors: Filing Chapter 13 means you'd effectively be working under a bankruptcy trustee who'd distribute all payments to your creditors. This is advantageous for you'd no longer have any contact with your creditors.
  4. Extension of plan: There are always provisions available for the extension of Chapter 13 plan. This gives you a certain amount of flexibility and you'd be able to plan out your payment depending upon your individual situation.
  5. Acts like a consolidation: Finally, one of the major advantages of Chapter 13 is that it acts as a consolidation loan. This is a convenient way to pay off your debts without being harassed by creditors and collection agencies.

Chapter 13 bankruptcy eligibility

Any debtor (doesn’t matter whether self-employed or operate an unincorporated business) can file Chapter 13 bankruptcy as long as the:

  1. Debtor’s unsecured debts are less than $360,475 and,
  2. Secured debts are less than $1,081,400.

An individual cannot file Chapter 13 bankruptcy or any other form of consumer bankruptcy if:

  1. A previous bankruptcy petition was dismissed during the preceding 180 days as of willful disobedience of the court’s orders and,
  2. He/she has not received, within 180 days before filing, credit counseling from a credit counseling agency approved by the U.S. Trustee's Office.

Effect on credit score

Chapter 13 bankruptcy remains on your credit report for 7 years from the date you file. Though Chapter 13 bankruptcy filing may have an initial negative impact on the debtor’s credit score, it improves over the life of the repayment plan. After the period of 7 years, all other negative reports on your credit file (like late payments on credit cards, foreclosures, etc.) must be removed.

If compared to Chapter 7 bankruptcy, your credit gets less hit in a Chapter 13 case. However, some limitations, that include inability to get high credit limit and borrow large amount of money, will be there until the bankruptcy stain completely disappears from your credit report.

Chapter 13 bankruptcy procedure

Requirements
To initiate a Chapter 13 bankruptcy case, a debtor must file a petition with a bankruptcy court serving within the area of the debtor’s primary residence. Unless and until the court orders otherwise, a petitioner needs to file:

  1. A list of assets and liabilities;
  2. A list of present income and expenses;
  3. A list of unexpired leases (if any) and executory contracts;
  4. A statement of his/ her entire financial affairs;

The debtor also needs to file a certificate of credit counseling and a copy of the debt repayment plan that was organized by the credit counseling agency. Apart from all these documents, the debtor must also file a copy of the tax return or transcripts for the most recent tax year with the chapter 13 bankruptcy trustee.

Forms
Apart from filing the required schedules with the bankruptcy court, a petitioner also needs to fill out some bankruptcy forms and compile the information that follow:

  1. A list of creditors, the debts and the nature of the debts;
  2. The source, sum and frequency of the debtor’s income;
  3. A schedule of all the debtor’s property; and
  4. A complete schedule of the debtor’s monthly living expenses.

In case the petitioner is married, he/she must gather all these information for his/her spouse regardless of whether they are filing a petition together, individually, or even if only one spouse is filing. Even if one spouse is filing, the income and expenses of the non-filing partner is required so that the court may get a clear idea about the household’ financial condition.

The official chapter 13 bankruptcy forms can either be purchased from legal stationary stores or downloaded from http://www.uscourts.gov/FormsAndFees/Forms/BankruptcyForms.aspx. The bankruptcy court doesn’t provide the forms.

Filing fees
In order to file Chapter 13 bankruptcy, you need to pay an amount of $235 with the bankruptcy court for case filing fee and a $6 for miscellaneous administrative fee. If the court permits, these can be paid in installments. However, the number of installments is limited to four and you must make the final installment within 120 days of filing the petition. Failure to pay these court fees may result in dismissal of your case.

Role of trustee
Whenever you file a petition with the bankruptcy court, a Chapter 13 bankruptcy trustee is appointed to administer your case. However, in some districts, the U.S. Trustee appoints a standing trustee to administer all Chapter 13 cases. The chapter 13 bankruptcy trustee evaluates the case, collects payments from the debtor and distributes them among the creditors.

Automatic stay
Once you file chapter 13 bankruptcy, an ‘automatic stay’ is put in place, which immediately stops all collection attempts. However, as per your individual condition, the stay may be effective for a short period of time. As long as the ‘automatic stay’ is there, no creditor is allowed to initiate or continue lawsuits, wage garnishments, or even make phone calls for debt repayment. The bankruptcy clerk officially notifies about the automatic stay to those creditors whose names and addresses are provided by the debtor.

Chapter 13 bankruptcy also has a special automatic stay provision for co-debtors. Unless the court orders otherwise, a creditor cannot chase a co-debtor until the automatic stay is in effect.

Creditors meeting
Between 21 and 50 days of filing the petition, the Chapter 13 bankruptcy trustee holds a meeting of creditors. During the meeting, the petitioner needs to take an oath and answer all the questions of the trustee and the creditors. Here, a Chapter 13 bankruptcy attorney can help you prepare for the meeting and tell you what to expect there. It’s only an experienced bankruptcy attorney who can help you achieve the outcome that you anticipate. However, the meeting cannot be held if more than 60 days have passed after the filing of the petition.

The Chapter 13 bankruptcy discharge

The scope of discharge in a Chapter 13 bankruptcy case is very complex and has recently undergone major changes. Therefore, prior to filing, debtors should seek competent legal counsel from an experienced Chapter 13 bankruptcy attorney regarding any possibility of discharge.

A debtor is entitled to a Chapter 7 bankruptcy discharge as long as he/she:

  1. Certifies that all domestic support obligations that came prior to make such certifications have been paid;
  2. Has not received a discharge in a previous case filed within the past 2 years; and
  3. Has completed an approved course in financial management.

A Chapter 13 bankruptcy discharge gives the debtor the required respite from all the debts as per the plan. However, there are certain exceptions. Debts that cannot be discharged in Chapter 13 bankruptcy are specifically long term obligations (such as mortgage), alimony or child support, certain taxes, debts for most government funded or guaranteed educational loans, and debts arising from death or personal injury.

Additional Resources

US State Bankruptcy Laws

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