So, what is unique about the Chapter 13 bankruptcy process? How much is it different from Chapter 7 bankruptcy? Don’t you think that the process is too similar since you fill out almost similar kinds of forms and submit almost same financial details to the bankruptcy court?
Yes, the process is a bit similar, but there are a few obligations you need to fulfill in Chapter 13 bankruptcy that usually don’t come along with Chapter 7.
Read more: Chapter 13 bankruptcy - Pay off your debts in a timely manner
How is Chapter 13 different from Chapter 7?
- To begin with, you’ve to propose a payment plan for approval.
- You need to explain how this payment plan will be suitable for you.
- You’ve to make monthly payments for 3-5 years.
Similarities between Chapter 7 and 13:
- You’ve to disclose your income, expenditures, assets and debts.
- Next, you’ve to show the copies of your income tax returns of previous years.
- Last but not the least, you’ve to show a credit counseling certificate.
Read more: Chapter 7 vs Chapter 13: An introspective comparison
Chapter 13 obligations for debtors - A preview
1. It is a must for debtors to pay administrative fees
Debtors need to pay a filing fee and an administrative fee within 120 days of filing Chapter 13 bankruptcy. The fee can be paid off in 4 installments if debtors have any financial problems. In case of exceptional situations, the court may give an extension and allow debtors to pay fees in the next 6 months.
- Filing fee: $235
- Administrative fee: $39
- Trustee fee - 30% to 10%
- Attorney fees
2. It is a must to start making payments within 30 days
If your proposed repayment plan gets approved by the court, then:
- You need to start making monthly payments within 30 days of submitting the petition.
- You need to distribute your payments amongst:
(a) unsecured debt
(b) secured debt
(c) priority debts
(d) administrative fees.
Unsecured debts: Debts not secured by any properties. Example: credit card debts, medical bills, health club bills.
Secured debts: Debts secured by a property. Example: mortgage, personal loan, home equity loan.
Priority debts: Debts that are not secured by any property but need to be paid in full. Example: wage, child support, tax debt, etc.
If your proposed repayment plan doesn’t get approved by the court, then:
Get your money back except the administrative fees.
3. It is a must to follow all the laws and the plan
The court may dismiss bankruptcy case if the debtor fails to:
- Pay child support and alimony
- Send payments to creditors and get into new debt problems
- Stay current on tax
Are debtors obligated to surrender their properties?
It depends upon the debtor’s choice. If the debtor feels that he/she needs to give up his/her property, then it’s allowed. But the court cannot compel him/her to do this.
Most debtors file Chapter 13 bankruptcy to protect their properties in exchange for a 5-year repayment plan. Plus, they need to pay the value of non-exempt properties in order to keep properties with them.
Can debtors keep disposable income to themselves?
No.
If debtors have any disposable income, then they should use it to pay off unsecured debts first. This includes: credit cards and medical bills.
How long are debtors obligated to make payments?
In Chapter 13 bankruptcy, debtors can either opt for a 3-year repayment plan or a 5-year payment plan.
(i) Three-year payment plan: This is suitable for debtors when their present monthly income is less than the average state’s median monthly income in the last 6 months. The court may approve their proposed payment plan even if they’re unable to fully pay off unsecured debts.
(ii) Five-year payment plan: This is suitable when debtor’s present monthly income is higher than the average state’s median monthly income.
The bottom line
As you’ve read, debtors have lots of obligations under Chapter 13 bankruptcy. But fortunately, co-signers won’t have any obligation if the loan is paid off through bankruptcy. Moreover, just like debtors, co-signers are protected from collection calls as well. In fact, this is one of the main reasons why several debtors choose Chapter 13 in spite of being eligible for Chapter 7.
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