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

What is Chapter 13 bankruptcy definition?

Chapter 13 bankruptcy (also known as the wage earner’s plan) is a type of personal bankruptcy wherein individuals discharge their eligible debts through a court-approved repayment plan.

Chapter 13 bankruptcy overview

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 $310 with the bankruptcy court for the case filing fee and a $75 for the 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.

Apart from the filing fees, you have to also pay the attorney fees. On average, a Chapter 13 bankruptcy lawyer costs around $2564 in the US. The cost may go up depending on the complexity of the bankruptcy 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.

How to file personal bankruptcy - Chapter 13

  1. Evaluate your debts: You may not qualify for Chapter 13 bankruptcy if your debt amount is too high. Moreover, debts like home loans, tax, and domestic support arrearages have to be paid in full within 3-5 years. Calculate your net monthly income to decide if you can make the required payments for so long.
  2. Calculate 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, repayment plan, and the total value of the nonexempt properties you want to keep. So try to calculate the figure accurately. If your income is too low, then you won’t qualify for Chapter 13.
  4. Complete the debtor’s education course: Before filing 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 to do this. He can help you to fill out and submit the requisite forms in the court. Enter your correct financial data and a draft of your proposed repayment plan. Based on the forms you’re submitting, the court will decide if you can qualify for Chapter 13.
  6. Attend all the hearings: After you have submitted all the documents, you’ll have a meeting with the bankruptcy trustee who will look over your case. He will deal with your creditors on your behalf. You have to pay a fee to this trustee too. Thereafter, there will be 341 meeting of creditors. This meeting is extremely important. You’ll meet both creditors and the trustee in this meeting. Creditors will ask all sorts of questions and you have to answer them honestly. You have to dodge their arguments to get your proposed repayment approved by the judge quickly.
  7. Stick 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, then they may dismiss your case.
  8. Do the post-filing course: Before you complete the payment plan, do a debtor education course and get a certificate. You’ll need this also for receiving your final discharge.
  9. Get bankruptcy discharge: Once you complete the repayment plan, you’ll your bankruptcy discharge. 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. 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.

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.

What happens when 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. You can try to discharge your eligible debts in the next case. Usually, when a Chapter bankruptcy case is dismissed without prejudice when there is a procedural mistake like submitting the wrong forms in the court. Other reasons for Chapter 13 bankruptcy dismissal are as follows:

  • Unable to make payments on time
  • Not attending the 341 meeting
  • Not completing the debtor education course
  • Not submitting the required documents to the bankruptcy trustee

If Chapter 13 bankruptcy case is dismissed with prejudice, then you’re in trouble. You can’t file Chapter 13 bankruptcy case straightway. You have to wait for a specific period (usually 180 days) to make a fresh appeal. In the worst scenario, you may not be allowed to discharge debts through Chapter 13 bankruptcy forever.

The bankruptcy court may also prevent you from discharging all your debts existing at the time of filing bankruptcy for the first time.

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 the bankruptcy automatic stay to stop collection calls or postpone foreclosure without intending to complete the Chapter 13 payment schedule.

Does chapter 13 bankruptcy stop wage garnishment?

Under federal and state laws, creditors can file a lawsuit against you for unpaid debts. If they win the case and the court issues judgment against you, then they can initiate the wage garnishment process. Usually, creditors send a copy of the court order to your employer and ask him to withhold a portion of your wage and send it to them every month until the debt is paid off. If your employer refuses to comply with the court order, then he has to face penalties for ignoring the court order. .

When you file Chapter 13 bankruptcy, all sorts of debt collection attempts are stopped immediately. This includes making debt collection calls, foreclosing your property, filing a lawsuit to collect debts, repossessing your vehicle, and garnishing your wage.

If your creditor is already garnishing your wage as per the previous court order, then you can stop it by sending a copy of your bankruptcy petition to your employer. You can also submit a copy of the bankruptcy petition in the HR department.

Exception

Although Chapter 13 bankruptcy stops wage garnishment in most cases, but it doesn’t protect you always. For instance, it won’t safeguard your paycheck in case of child support and alimony payments. Your wage will also be garnished for federal student loans and unpaid income tax.

For more details, you can ask questions to an experienced Chapter 13 bankruptcy attorney. He can give you detailed explanations.

Bankruptcy Chapter 13 vs 7 - Which one is better

Not sure if you should opt for Chapter 13 or Chapter 7 bankruptcy payments? Here is a brief comparative analysis to help you make an informed decision.

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 from real estate property. Can discharge liens attached to real estate properties.

Here is an introspective comparison between Chapter 7 and 13 bankruptcy.

US State Bankruptcy Laws

Last Updated on: Wed, 12 Feb 2020

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