Alternate name: The wage earner’s plan
For example, someone who is having trouble staying on top of all their bills every month might skip the car bill one month, and the mortgage the next, and juggle between them in order to avoid defaulting on any loan. Rather than fall into full Chapter 7 bankruptcy and damage their credit, they may be able to file for Chapter 13 bankruptcy to consolidate their bills and continue making payments toward all their debts in a more manageable and consistent fashion.
How Chapter 13 Bankruptcy Works
When you file for Chapter 13 bankruptcy, you’ll file with your state of residence or where your business is domiciled. You will have to submit financial statements, tax returns, a list of all debt obligations, and a certificate of credit counseling. The courts will charge filing and administrative fees, which can typically be paid in installments.
The Payment Plan
Chapter 7 is a relatively brief process and usually only lasts four to six months before the court issues the discharge. Chapter 13, on the other hand, will last from three to five years, depending on the length of a monthly payment plan the court accepts for you to pay certain debts. The Chapter 13 plan, or simply the payment plan, is the heart of a Chapter 13 case. Chapter 13 is an attempt to “reorganize” your debt (or your joint debts with your spouse) over time. It’s a great tool for the debtor who is behind on house payments or car payments. Those payments can be caught up with the payment plan over time, thereby saving the house from foreclosure or the car from repossession. The plan will also include any past-due priority claims, such as alimony, child support, or recent income taxes. The Chapter 13 plan can also include payments toward unsecured debt such as credit cards and medical bills. A calculation is applied to your income and expenses to determine whether you have any disposable income after all your other obligations are met. You’re expected to devote your disposable income to your plan payment, and that money will be used to pay unsecured creditors. If you don’t have enough disposable income to pay your unsecured debt in full over the course of the payment plan, the court will just require that your full disposable income go toward these payments. As long as your unsecured creditors get as much as they would have under Chapter 7, you’ll meet your obligations.
Chapter 13 Trustee
The Chapter 13 trustee acts as the main point of contact for a debtor. The trustee will review the proposed payment plan and has the authority to challenge the plan in bankruptcy court if they believe that it is improper. If the Chapter 13 plan is confirmed by the bankruptcy court, the trustee acts as an intermediary between the debtor and creditors receiving payments. Specifically, the debtor makes payments each month to the trustee. The trustee then divides up the payment, as established in the Chapter 13 plan, and issues payments to the creditors.
Restrictions During Chapter 13 Bankruptcy
Chapter 13 bankruptcy carries with it a few restrictions which are not present in Chapter 7 bankruptcy, the monthly plan payment being the most obvious. In addition, you will not be allowed to incur any more debt without court approval. As in any situation where you still hold liens against major assets, you will have to maintain insurance coverage on those assets.
Discharge
if you stick with your payment plan to the end, then any remaining consumer debt and eligible secured debts will be discharged. You may be left with debts that are not discharged, such as student loans. Chapter 13 discharge is personal, meaning that any cosigners may still be obligated to any outstanding debts once your Chapter 13 payment plan ends.
Requirements for Chapter 13 Bankruptcy
To be eligible for Chapter 13 bankruptcy, you must meet certain requirements:
Debt limits: You must have less than $394,725 in unsecured debts and less than $1,184,200 in secured debts. (These are the most current figures as set in 2020, due to be revised in April 2022 based on shifts in the consumer price index.) Compliance: You must not have willfully failed to appear in court, failed to comply with court orders, or been voluntarily dismissed after creditors sought payment via bankruptcy court within the last 180 days. Credit counseling: Within 180 days before filing, you must have gotten credit counseling from an approved agency. Income threshold: You must prove that you have enough surplus monthly income to meet the obligations of the new repayment schedule, as well as continuing payments on your mortgage and other secured debts.
These requirements apply to any individual, even those who are self-employed or running an unincorporated business. Corporations and partnerships may not file for Chapter 13 bankruptcy.
