Chapter 13 Bankruptcy

Chapter 13 Bankruptcy

A Chapter 13 Bankruptcy is called a wage earner’s plan; however many people also refer to it as “reorganization”. Ch 13 can be filed with NO $ money down as long as the debtor has steady income. A Chapter 13 Bankruptcy enables people with a steady stream of income to propose a plan to repay all or some of their debts. This payment plan lasts between three to five years.

Chapter 13 Bankruptcy Plan

A Chapter 13 Bankruptcy differs from a Chapter 7 in several key areas. First, is the length of the case. A debtor can receive a discharge in as little as 3 months. For Chapter 13 – you are looking at a minimum of 36 months. The second main difference is that a Chapter 13 requires the debtor to file a Plan with the court. The plan is essentially a proposal to the court which details which creditors, if any, are getting paid and the terms of any payment.

After the bankruptcy petition is filed, the debtor has 14 days to file a repayment plan with the court. The plan is subject to court approval and must provide payments of fixed amounts to the Chapter 13 Trustee on a regular basis. The Chapter 13 Trustee takes this money and pays creditors according to the terms of the plan. The debtor must begin making plan payments within 30 days after filing the bankruptcy case.

How Long and How Much Is My Plan?

There are two basic tracks that a Chapter 13 can take: Above Median or Below Median.

  • Above median: If you are above median, the minimum commitment period is five years. There is a presumption that you have the means, or the ability to pay back other creditors.
  • Below median: If you are below median, the minimum commitment period is three years. There is no presumption of disposable monthly income to other creditors.
  • The amount of debt and length of case dictates the minimum monthly payment.
  • Additionally, above median debtors will pay any disposable monthly income above and beyond the minimum monthly payment.

how much is a chapter 13 bankruptcy plan payment?

The monthly payment plan depends on a couple things. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” (1) If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. 11 U.S.C. § 1322(d). During this time the law forbids creditors from starting or continuing collection efforts.

Who Gets Paid What?

  • Filing fees are administrative fees under Federal Rules of Bankruptcy Procedure Rule 1006. As a result, they must be paid back within 120 days unless the debtor requests an extension and shows cause. Most debtors do not pay the $313 filing fee up front. The bankruptcy court staff reside in the clerk’s office and review the bankruptcy petition, schedules and related documents.
  • Attorney fees – the debtor usually pays back their legal fees over the life of the Chapter 13 plan.
  • Priority debts – the bankruptcy code requires the Debtor to pay priority debts in Chapter 13. Therefore, it is important for the Chapter 13 bankruptcy attorney to know how much priority debt a debtor has. Generally speaking, a priority debt is a debt that takes priority over other debts. The most common types of priority debts include tax debts and child support. If you have tax debts that qualify as priority debt, child support or separate maintenance – these must be paid back in your bankruptcy.
  • Secured debts are debts secured by physical collateral. The most common types of secured debts are car loans, title loans and mortgages. The debtor cannot keep a secured debt without paying for it. As a result, the debtor pays the secured debts direct to the creditor or via the Chapter 13 plan. The debtor must stay current during the bankruptcy.
  • Mortgage payments – if you are current on your mortgage when you filed Chapter 13, then you will continue to make your payments directly to your mortgage company. If you are behind, you can pay the arrears and ongoing payments through the bankruptcy.

What About My Other Creditors?

A Chapter 13 Bankruptcy proposes to pay back a debtor’s disposable monthly income. Sometimes a Chapter 13 Bankruptcy pays back 100% of the creditors. On the other hand, sometimes a debtor only pays back a small fraction of their creditors. It really comes down to who the debtor owes money to and how much they make. A Chapter 13 Bankruptcy is not a punishment, so if a debtor is below the median with no disposable monthly income, then you will probably not pay much to these other creditors.

benefits of chapter 13 bankruptcy

Chapter 13 has several benefits over liquidation under chapter 7. Perhaps the biggest, chapter 13 offers debtors an opportunity to save their homes from foreclosure. by curing past due mortgage payments over a 3 – 5 year period of time. Debtors in chapter 13 must also still make all ongoing mortgage payments during the chapter 13 plan – this is often referred to as the conduit payment. Another benefit of chapter 13 is that it allows debtors to stretch out other secured debts over the life of the chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects non-filing codebtors. Finally, chapter 13 acts like a consolidation loan under which the debtor makes the plan payments to a chapter 13 trustee who then pays the creditors on their behalf – so debtors have no direct contact with creditors while under chapter 13 protection.

chapter 13 bankruptcy eligibility

Generally speaking, most people qualify for a chapter 13 bankruptcy. There is a debt ceiling or maximum allowed in a chapter 13 – the unsecured debts must be less than $383,175 and secured debts are less than $1,149,525. 11 U.S.C. § 109(e). These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor. There are other qualifications – a debtor must receive credit counseling from an approved credit counseling agency within the prior 6 months before filing bankruptcy.

discharge debts in chapter 13 bankruptcy

A debtor is entitled to a discharge once all the plan payments have been made and the debtor certifies that any domestic support obligations that came due while in the Chapter 13 Bankruptcy were paid. The debtor must also certify they have completed their second credit counseling course.

Chapter 13 Bankruptcy Discharge

At the end of your case, once you have made all of your monthly payments your Ch. 13 bankruptcy lawyer will file a motion for entry of discharge. Once the objection deadline expires 30 days later, the Judge signs the order of discharge. To understand the different types of debts and what are dischargeable in a bankruptcy, click HERE.

Chapter 7 vs 13 Bankruptcy

For a brief overview of the differences between Chapter 7 vs 13 Bankruptcy, click HERE. There are several advantages and disadvantages to both.

Some key takeaways on Chapter 13 Bankruptcy:

  • You can pay back tax debts in a Chapter 13 at 0% interest.
  • Student loans go into deferment for the duration of the Chapter 13 Bankruptcy. As a result the debt will grow larger during the bankruptcy.
  • Chapter 13 is a good solution to stop auto repossession.
  • You can get caught up on your mortgage payments if you are behind.
  • Pay back high interest rate title loans or car loans at 4.75% – 5%.