Table of contents
- What is the definition of chapter 13 bankruptcy?
- How to file for chapter 13 bankruptcy
- Advantages of Chapter 13 bankruptcy
- Chapter 13 bankruptcy eligibility
- What effect will a chapter 13 bankruptcy have on your credit score?
- Chapter 13 bankruptcy discharge
- What happens when a chapter 13 bankruptcy is dismissed?
- Will chapter 13 bankruptcy stop wage garnishment?
- Chapter 13 vs chapter 7: Which is better?
Chapter 13 of Title 11 of the United States Bankruptcy Code governs a certain form of bankruptcy that allows debtors to undergo 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 common form of debt consolidation.
What is the definition of chapter 13 bankruptcy?
A chapter 13 bankruptcy, also known as the wage earner’s plan, is a type of personal bankruptcy wherein individuals discharge their eligible debts by way of a court-approved repayment plan.
To initiate a Chapter 13 bankruptcy case, a debtor must file a petition with a bankruptcy court serving the area of the debtor’s primary residence. Unless the court orders otherwise, a petitioner needs to file:
- A list of assets and liabilities
- A list of current income and expenses
- A list of any unexpired leases and executory contracts
- A statement of their financial affairs as a whole
- A certificate of credit counseling
- A copy of the debt repayment plan that was organized by the credit counseling agency
- A copy of the tax return for the most recent tax year
The tax return goes to the trustee, not the court.
The petitioner also needs to compile the information necessary to prepare the associated forms:
- A list of creditors, including the debts and the nature of the debts
- The source, sum and frequency of the debtor’s income
- A list of all the debtor’s property
- A complete accounting of the debtor’s monthly living expenses
If the petitioner is married, they must gather this information for their spouse regardless of whether they are filing a petition together, individually, or 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 picture of the household’s financial situation.
The official chapter 13 bankruptcy forms can either be purchased from legal stationery stores or downloaded from https://www.uscourts.gov/FormsAndFees/Forms/BankruptcyForms.aspx. The bankruptcy court doesn’t provide the forms.
In order to file chapter 13 bankruptcy, you need to pay a case filing fee of $310 and an administrative fee of $75 to the bankruptcy court. 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 the court dismissing your case.
Apart from filing fees, you also have to pay attorney fees. On average, a chapter 13 bankruptcy lawyer costs $2564 in the US. The cost may be substantially higher depending on where you live and the complexity of the case.
Role of Trustee
When you file a bankruptcy petition, the court appoints a chapter 13 bankruptcy trustee to administer your case. In some districts, that would be the standing trustee appointed by the U.S. Trustee to administer all chapter 13 cases. The chapter 13 bankruptcy trustee evaluates the case, collects payments from the debtor, and distributes those payments to creditors.
Once you file for chapter 13 bankruptcy protection, the court issues an automatic stay that immediately stops all collection attempts. Depending on your individual situation, the stay may be effective for only a short period of time. As long as the automatic stay is there, no creditor is allowed to initiate or continue lawsuits, garnish wages, or even make phone calls to collect on your debt. The bankruptcy clerk will officially inform the creditors whose names and addresses were provided by the debtor of the automatic stay.
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 while the automatic stay is in effect.
The chapter 13 bankruptcy trustee will hold a creditors’ meeting between 21 and 50 days of filing. During the meeting, the petitioner must take an oath and answer all the questions posed to them by the trustee and the creditors. A chapter 13 bankruptcy attorney can help you prepare for the meeting and tell you what to expect. Only an experienced bankruptcy attorney can help you achieve the outcome that you want.
If for some reason 60 days pass after filing the petition and the meeting has not taken place, it’s too late. The meeting cannot be held.
How to file for chapter 13 bankruptcy
- 1 Evaluate your debts: You may not qualify for chapter 13 bankruptcy if you owe too much. Moreover, debts like home loans, taxes, and domestic support arrearages have to be paid in full within 3-5 years. Calculate your net monthly income to determine if you can make the required payments for that period.
- 2Calculate your property value: Figure out the total value of your property. Ask your chapter 13 bankruptcy lawyer how much you can safeguard your property using bankruptcy exemptions.
- 3 Analyze your income: You must have enough income to cover your monthly expenses, the repayment plan, and the total value of the non-exempt properties you want to keep. Try to accurately calculate that figure. If your income is too low, you won’t qualify for chapter 13.
- 4Complete the debtor’s education course: Before filing for bankruptcy, enroll yourself in a credit counseling course and get a certificate. You need to submit it to the bankruptcy court.
- 5 Submit all the bankruptcy forms: Your chapter 13 bankruptcy attorney can help you do this. They can help you fill out and submit the requisite forms in court. Enter your correct financial data and a draft of your proposed repayment plan. Based on the forms you submit, the court will decide if you qualify for chapter 13.
- 6 Attend all the hearings: After you submit all the documents, you’ll have a meeting with the bankruptcy trustee supervising your case. They will deal with your creditors on your behalf. You have to pay a fee to this trustee, too.
After that, you must attend what is called a 341 meeting. This meeting is extremely important. You’ll meet with your creditors and the trustee. Creditors will ask all sorts of questions. It’s important that you answer them honestly. You will have to overcome their arguments to get your proposed repayment approved by the judge in a timely manner.
- 7Stick to the repayment plan: Once the court approves your repayment plan, you should start making payments within 30 days. If you miss your payments without notifying the court, they may dismiss your case.
- 8Do the post-filing course: Before you complete the payment plan, complete a debtor education course and get the certificate. You’ll need this to receive your final discharge.
- 9Get bankruptcy discharge: Once you complete the repayment plan, the court will discharge your bankruptcy. This discharge gives you relief from your financial burden. Finally, you’re done with your debts. Congratulations!
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 You can save your home: By filing chapter 13 you may be able to save your home. Filing Chapter 13 enables you to stop foreclosure proceedings. This might help you cure delinquent mortgage payments over time.
- 2 You can reschedule your secured debt: Another advantage of chapter 13 bankruptcy is that you can reschedule your debt. That means extending the payment period, thereby lowering the payments. For the most part, you may only reschedule secured debts, except for the mortgage on your primary residence.
- 3 You won’t have direct contact with creditors: Filing chapter 13 means you will effectively be working under a bankruptcy trustee who will distribute your payments to your creditors, which means you won’t have to talk to them anymore.
- 4 The plan is extensible: There are always provisions available to extend your chapter 13 plan. That gives you a certain amount of flexibility, allowing you to adjust your bankruptcy to your individual situation.
- 5 It acts like a consolidation loan: Finally, a major advantage of chapter 13 is that it acts like a consolidation loan, making it a convenient way to pay off your debts without being harassed by creditors and collection agencies.
Chapter 13 bankruptcy eligibility
Any debtor can file for Chapter 13 bankruptcy as long as the:
- Debtor’s unsecured debts are less than $419,275 and,
- Secured debts are less than $1,257,850.
An individual cannot file for Chapter 13 bankruptcy or any other form of consumer bankruptcy if:
- A previous bankruptcy petition was dismissed during the preceding 180 days for willful disobedience of the court’s orders and,
- 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.
What effect will a chapter 13 bankruptcy have on your credit score?
A chapter 13 bankruptcy will remain on your credit report for 7 years from the date you file. Although a chapter 13 bankruptcy filing may have an initial negative impact on the debtor’s credit score, the score tends to improve over the life of the repayment plan. After 7 years, all other negative reports on your credit file (like late payments on credit cards, foreclosures, etc.) must be removed.
Compared to chapter 7 bankruptcy, your credit takes a smaller hit with chapter 13. However, some limitations, including the inability to get a high credit limit or borrow large amounts of money, will be there until the bankruptcy completely disappears from your credit report.
Chapter 13 bankruptcy discharge
The scope of discharge in chapter 13 bankruptcy is very complex and has recently undergone major changes. Therefore, prior to filing, debtors should seek competent legal counsel from an experienced bankruptcy attorney before seeking a chapter 13 bankruptcy.
Debtors are entitled to a chapter 13 bankruptcy discharge as long as they:
- Certify that their domestic support obligations that existed prior to applying for discharge have been paired;
- Have not received a discharge in a previous case filed within the past 2 years; and
- Has completed a court-approved course in financial management.
A chapter 13 bankruptcy discharge releases the debtor from the debts provided for by the plan. However, there are certain exceptions. Debts that cannot be discharged in chapter 13 bankruptcy are specifically long-term obligations (such as mortgages), alimony or child support, certain taxes, debts for most government-funded or guaranteed educational loans, and debts arising from death or personal injury.
What happens when a chapter 13 bankruptcy is dismissed?
Much depends on how your bankruptcy case is dismissed. If your bankruptcy case is dismissed without prejudice, then you can refile immediately and try again. Usually, when that happens it is because there has been a procedural mistake like submitting the wrong forms to the court. Other reasons for chapter 13 bankruptcy dismissal are as follows:
- The debtor did not make payments on time
- The debtor did not attend the 341 meeting
- The debtor failed to complete the debtor education course
- The debtor did not submit the required documents to the bankruptcy trustee
If your chapter 13 bankruptcy case is dismissed with prejudice, then you’re in trouble. You can’t file another chapter 13 bankruptcy case right away. You have to wait for a specific period (usually 180 days) to make a fresh attempt. In the worst scenario, you may not be permanently barred from discharging debts through chapter 13 bankruptcy.
The bankruptcy court may also prevent you from discharging all your debts existing at the time you first filed for bankruptcy.
Usually, chapter 13 bankruptcy is dismissed by the court when you:
- Hide assets and income to take advantage of chapter 13 bankruptcy.
- Violate or manipulate bankruptcy laws.
- Use this automatic stay to stop collection calls or postpone foreclosure without intending to complete the chapter 13 payment schedule.
Will chapter 13 bankruptcy stop wage garnishment?
When you file chapter 13 bankruptcy, the court will order all sorts of debt collection attempts to cease immediately. This includes debt collection calls, property foreclosure, lawsuits for the purposes of collecting debts, vehicle repossession, and, of course, wage garnishment.
If a creditor is already garnishing your wages, you can stop it by sending a copy of your bankruptcy petition to your employer, such as by submitting a copy of the bankruptcy petition to the HR department.
There are exceptions, however.
Wages that are being garnished for child support and alimony payments are not protected. Neither are wages that are being garnished for federal student loans or unpaid income tax.
For more details, speak to an experienced chapter 13 bankruptcy attorney.
Chapter 13 vs chapter 7: Which is better?
Not sure if you should opt for chapter 13 or chapter 7 bankruptcy? Here is a brief analysis:
|Bankruptcy Chapter 7||Bankruptcy Chapter 13|
|It’s a liquidation process.||It’s a reorganization plan.|
|Debts are usually discharged within 3 - 4 months.||Debts are discharged within 3 - 5 years.|
|Non-exempt assets are sold.||Debtors can keep their assets.|
|Can’t discharge liens attached to real estate properties.||Can discharge liens attached to real estate properties.|