If debts have become unmanageable, filing for Chapter 13 bankruptcy may be an option for people with assets to protect. Also termed “wage earner’s bankruptcy,” Chapter 13 allows people with a steady income to catch up on their payments while retaining their property.
Filing for Chapter 13 is a complicated process without an experienced debt relief attorney. This was confirmed in a 2011 study put together by the Bankruptcy Court for the Central District of California. That study tracked bankruptcy cases filed without an attorney’s assistance, and it found that less than 0.5 percent of Chapter 13 filers were able to get their repayment plan approved. It’s a challenging process, but one that is manageable with the help of a reputable attorney.
The Basics of Filing Chapter 13 Bankruptcy
During Chapter 13 bankruptcy, the debtor’s assets are not sold off to pay creditors. Instead, the debtor and their attorney must produce a repayment plan that resolves in three to five years. The plan must commit all of the debtor’s disposable income (the income remaining after necessary monthly expenses and debt payments) to paying back creditors.
The repayment plan must outline how “priority” debts and secured debts are to be paid back in full. Priority debts include child support, alimony, taxes, wages owed to employees and contributions to employee benefit funds. Secured debts include anything that is secured with collateral, like a home or vehicle. These debts are not discharged during Chapter 13 bankruptcy, so they must be paid off completely by the end of the plan. If the debtor does not resolve secured debts, they may have to forfeit the property.
Unsecured debts are handled differently. Most plans only have to pay back a small portion of what is owed on unsecured accounts. Exactly how much depends on a few factors, including:
- How long the repayment plan lasts.
- The amount of disposable income leftover to pay back creditors.
- The value of the debtor’s nonexempt property. Nonexempt property is not protected during the bankruptcy process, so the debtor must pay the value of the nonexempt property to unsecured creditors during the plan.
If the repayment plan is properly executed, the court will discharge any remaining unsecured debts, like credit cards or medical bills. This is the goal for many people who work through the bankruptcy process, as large amounts of unsecured debt are a problem for many.
Chapter 13 Eligibility
Chapter 13’s eligibility standards are easier to meet than Chapter 7’s standards, and many people who opt for Chapter 13 do so because they do not qualify for Chapter 7. Still, a debtor must tick several boxes before they can pursue a Chapter 13 case, including:
- The debtor must have a regular source of income.
- The debtor’s total unsecured debt may not be greater than $394,725, and their total secured debt may not exceed $1,184,200.
- The debtor must be current with their tax filings.
- The debtor may not have filed for Chapter 13 in the previous two years.
- The debtor may not have filed for Chapter 7 in the previous four years.
- If the debtor filed a bankruptcy petition in the past 180 days that was dismissed for certain reasons (like failing to comply with court orders), they will be considered ineligible for Chapter 13 bankruptcy.
The majority of debtors can meet these requirements, but if there are any doubts, an attorney can help debtors evaluate their finances and make a determination.
How to File for Chapter 13 Bankruptcy
The filing process for Chapter 13 bankruptcy is complicated, but it must be followed precisely to prevent the case from being dismissed. It’s strongly recommended that an experienced bankruptcy attorney guide the process, as this will protect against procedural errors like missed deadlines and improperly filled out paperwork.
Here’s what the filing process looks like:
- Attend credit counseling – Bankruptcy courts require debtors to go through pre-filing bankruptcy counseling before their case is accepted. The point of counseling is to look at possible alternatives to bankruptcy, though viable alternatives are rarely found. The counselor may provide help in putting together a repayment plan and offer advice on how to avoid a second bankruptcy in the future.
- Put the paperwork together – A bankruptcy attorney will assist their client in gathering all mandatory information and ensuring all forms are properly filled out. Some of the information debtors must provide include data on income, debts, property valuations and monthly expenses.
- File a bankruptcy petition – When a debtor submits the necessary forms to the court, they are officially filing a petition for bankruptcy and requesting a case be opened. Things start moving faster at this point, because the court will appoint a bankruptcy trustee and institute an automatic stay. An automatic stay prevents most attempts to collect on outstanding debts, giving the debtor time to get their financial affairs in order.
- Provide a repayment plan – Debtors and their attorneys are expected to provide a repayment plan within 14 days of petitioning the court. Payments on the plan must begin no later than 30 days after the petition, even if the plan must still be approved.
- Meet with creditors – The debtor must meet with their creditors and the bankruptcy trustee, who will guide the meeting. During this session, the creditors will raise any concerns with the plan or any other elements of the bankruptcy case.
- Confirm the plan – The debtor, trustee and creditors will meet a second time, within 45 days of the first meeting. If the creditors are satisfied with the plan’s details, it is confirmed and put into action.
- Make payments – Once the repayment plan is confirmed, it is up to the debtor to make their monthly payments on time. This continues for the plan’s duration.
- Attend a final credit counseling course – After the payments are made, but before debts are discharged, the debtor must attend a second financial counseling session. This session is filled with advice on how to maintain healthy finances post-bankruptcy, and the court will require it.
If all of the above steps are followed to the letter, remaining unsecured debts are discharged and the debtor can move on without fear of further collection attempts. For many, this alone makes bankruptcy worth considering, and with an attorney’s assistance, it’s a process that can be completed successfully.