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