Chapter 13 bankruptcy is classified as a reorganization bankruptcy. This is opposed to something like Chapter 7 bankruptcy, which is classified as a liquidation bankruptcy. In a Chapter 7 bankruptcy you must give any non-exempt property that you have in exchange for most of your debts being wiped out. Unlike this liquidation process, during a Chapter 13 bankruptcy, you will not have to fork over any property. Instead, you will be required to make a structured repayment plan that shows how you will use your income to pay off your debts over time, typically three to five years.
Eligibility for Chapter 13 Reorganization Bankruptcy
Before you can think about filing for Chapter 13 bankruptcy, you must be able to show that you are eligible to file for it. Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy uses your income to pay off your creditors for the money you owe. If your income is too low, or if it is not regular, then you may not be able to make payments according to the schedule and you will not be eligible for Chapter 13 bankruptcy.
In addition, there are certain debt limits that may prevent you from filing for Chapter 13 bankruptcy. An unsecured debt is one where your creditor does not have the right to take a specific item of property if the debt is not repaid. Conversely, a secured debt is one where a creditor "secures" the loan by your promise that the creditor is allowed to take a specific item of property the debt is not paid.
Process for Chapter 13 Reorganization Bankruptcy
In order to file for bankruptcy, you must first receive credit counseling from one of the agencies that has been approved by the United States Trustee's office. Although you may be charged for their services, these agencies are required to provide free or low cost credit counseling if you can show that you are not able to pay.
In addition to the required credit counseling, you will also have to pay a fee to file your Chapter 13 reorganization bankruptcy. As of May 2017, the filing fee for Chapter 13 bankruptcy is $310.
Repayment Plans for Chapter 13 Reorganization Bankruptcy
Perhaps the most important, and most tricky, part of a Chapter 13 bankruptcy will be the repayment plan. This paperwork will describe, in minute detail, how much you will pay to which creditors to pay down your debts. Although there is no standardized, official form to be used, many courts have developed their own that may be useful for you in making your repayment plan.
How Much Do You Need To Pay?
Under your Chapter 13 repayment plan, you must include a plan to pay certain debts in full. Called "priority debts," these debts are considered to be more important that other debts and can jump the line to the head of the bankruptcy repayment plan. These debts include things like taxes that are due and owing as well as child support payments.
There are other things that must be included in your repayment plan as well. For example, payments on any secured debts have need to be included in the plan (such as car or home payments). In addition, if you have fallen behind on any of these secured debt payments, these late payments should be included in the repayment plan.
Lastly, the repayment plan must also show that if you have any disposable income after making payments on secured debts, that this money goes towards making payments on unsecured debts. It may not be required that you make payments if you do not have any disposable income, but you must show a good faith effort to repay your unsecured debts.
Length of Repayment Plan
As a general rule, if your average monthly income for the six months prior to your bankruptcy filing was more than the median income for your state, you will have to propose a repayment plan that is five years long. If, on the other hand, your average income for the same time period is less than the median income for the state, then you will propose a three year repayment plan. However, if you pay off all of your debts in full before the end of the repayment plan, your repayment plan will end.
Failing To Make Plan Payments
There are often situations that may befall you where you will become unable to make payments on your repayment plan. For instance, if you lost your job after getting into the repayment plan, the bankruptcy trustee may be able to modify your repayment plan to match your new circumstances. As well, if making payments on the repayment plan would pose an undue hardship (if you were hospitalized for a long period of time), a bankruptcy judge may decide to discharge your debts.
If neither of these options were available to you, you may be able to convert your Chapter 13 reorganization bankruptcy to a Chapter 7 liquidation bankruptcy. Or, you may ask the bankruptcy court to dismiss your bankruptcy case all together. If you take the second option, you would still owe your debts, and any interest that creditors did not charge you while you were in your bankruptcy proceeding.
The End of a Chapter 13 Reorganization Bankruptcy
If you have stuck to it, at the end of your repayment plan, all of your remaining debts that are eligible to be discharged will be wiped out by the bankruptcy court. However, before a court can discharge your debts, you must show the judge that you are current on all of your non-dischargeable debts, and that you have completed a budget counseling course at an agency that is approved by the United State's Trustee's office.
Contact a qualified bankruptcy attorney to find out your options for navigating the best path forward.