Chapter 13 bankruptcy provides relief for individuals who are overwhelmed by the accumulation of debt. Many people don't see their way out of debt when they have difficulty paying just the monthly interest.
When you fall behind on your house repayments, or when you don't see a way to repay those mounting arrears on your car payments, Chapter 13 provides a financial reorganization that can help you retain your assets while providing relief from the debt. It protects you from collection action during the case lifetime and it may discharge almost all remaining balances toward the end.
Chapter 13 is often referred to as a wage earner's plan or reorganization bankruptcy. Your bankruptcy attorney will help you negotiate with the creditors to accept reduced repayment as payment in full. Chapter 13 discharges debts that may not be discharged under Chapter 7. Ultimately, Chapter 13 is a powerful tool that enables you to keep your assets, regain control of your debts over a period of three to five years, and start over.
If you want to save your home, Chapter 13 provides a means for you to do that. Both Chapter 13 and Chapter 7 can be used to stop foreclosure on your home. Chapter 13, however, enables you to create a repayment plan which allows you to catch up on the payments you owe to your mortgage lender. A repayment plan can last up to five years, whereas a chapter 7 bankruptcy filing requires you to pay off the mortgage in a few months. Failing to do so would result in foreclosure proceedings.
Chapter 13 is a good choice for debtors who:
- Owe marital property settlements, child support, taxes and other debts that cannot be discharged under Chapter 7;
- Have liens that exceed the value of the assets that secure the debts;
- Are behind on house and car payments;
- Have assets with values that exceed the available exemptions;
- Are repaying loans to retirement funds that are not permitted in Chapter 7.
Chapter 13 plans can provide for fractional payment of debt, depending on confirmation tests, however, priority claims such as family support and recent taxes must be paid in full.
Chapter 13 Eligibility
In order to be deemed eligible to file a Chapter 13 bankruptcy, an individual must:
- Be an individual (no partnerships or corporations);
- Earn a regular income that is greater than your reasonable living expenses;
- Have liquidated and unsecured debts less than $383,175 and secured debts of less than $1,149,525.
Liquidated debt is a debt where the debtor can easily calculate the amount owed, such as a loan. An unliquidated debt is one where the amount owing is not available until judgment is entered, such as damages from an auto accident.
California courts must determine your eligibility to file for Chapter 13. It's up to you to prove to the court that your income is sufficient to meet the payment obligations. It is not uncommon for the courts to determine that someone is unable to repay their debts under Chapter 13 if they receive a low or irregular income, or if the debts are too much.
Individuals with secured debt (property that can be repossessed by the creditor) exceed $1 million, or if your unsecured debt (credit cards, medical bills, utilities) exceeds $350, 000, you may not qualify to file under Chapter 13.
If you have sufficient income to repay some of your debts, which are below the above restrictions, you may be deemed eligible to file for Chapter 13 bankruptcy.
Individuals who do not qualify for a Chapter 7 bankruptcy and those who want to protect certain assets often find Chapter 13 to be a great alternative, which is particularly helpful for debts that cannot be discharged through Chapter 7, such as:
Mortgage on your home (and additional mortgages)
- Spousal support (alimony)
- Child support
- Car loans
- Student loans
Chapter 13 also offers much more flexibility than Chapter 7. Provided you keep up your monthly repayments according to the payment plan, you may not be required to repay the full debt.
How Chapter 13 Bankruptcy Works
Chapter 13 provides a means for you to save your home from foreclosure. As soon as you file your Chapter 13, the court activates a stay which stops foreclosure proceedings. It them gives you an opportunity to make your past-due payments current over a recent time period. However, if the mortgage company completes the foreclosure sale before you file the petition, you will still lose the home. Likewise, if you fail to meet the regular mortgage payments that become due after filing the Chapter 13 bankruptcy, you may still lose your home.
Before filing for Chapter 13, you have to receive credit counseling from a United States Trustee's office approved credit counseling agency. In most cases, credit counseling agencies charge a fee, but they are obliged to work out a plan to accommodate you. Additionally, the courts charge a $274 filing fee.
After you have been through credit counseling, you can speak to a bankruptcy attorney about filing for Chapter 13. The attorney will help you to prepare the documentation, which totals around seventy pages. Your attorney will also help you to prepare a Chapter 13 repayment plan, which details how you will be repaying your debts. The lawyer will also help you select what should be included in your repayment plan and help create a budget that is more balanced for your income and debts.
Under Chapter 13, some priority debts will have to be paid in full, and will be paid during the early stages of the repayment process, including:
- Child support
- Certain taxes
- Employee wages.
The repayment plan will address your secured debts for tangible assets, including your house and car. It will also show how you will use the disposable income that is left after you have taken care of your secured and priority debt to repay your unsecured debt, such as medical bills and credit cards. In some cases, the courts discharge all the unsecured debt.
The Chapter 13 trustee will schedule a meeting of creditors between three weeks to 50 days after the initial filing of the Chapter 13 petition. It must be held within sixty days of the filing, at a place that does not employ bankruptcy administrators or U.S. Trustees. The debtor is obliged to attend the meeting and will be under oath, and both the creditors and the trustee will ask questions.
Bankruptcy judges are not permitted to attend creditors' meetings, so as to preserve their independent judgment. Most often, parties resolve issues with the plan during or within a few days of the meeting. The debtor can often avoid issues by ensuring that the plan and petition are accurate and complete. This can be achieved by consulting with the trustee prior to the meeting of creditors.
Unsecured creditors who wish to participate in the distributions of the bankruptcy estate must file their claims within ninety days after the first date set for the meeting of creditors, unless the creditor is a governmental unit. Governmental units have up to 80 days to file a proof of claim.
A court hearing will take place after the meeting of creditors. A debtor must then file a repayment plan within 14 days of the Chapter 13 petition for court approval. The plan must include fixed payment amounts to the trustee on a regular biweekly or monthly basis. The trustee will be responsible for distributing funds to the creditors according to the terms set out i the plan. Most often, the amounts will differ from the creditors' claims.
Chapter 13 allows for three types of claims, namely:
- Priority claims, which are granted special status by bankruptcy law, including the costs of the bankruptcy proceeding and most taxes.
- Secured claims that afford the creditor the right to repossess certain types of property as collateral if the debt is not paid.
- Unsecured claims are those that are not protected against collection.
Priority claims must be paid in full, unless a priority creditor agrees to the alternative treatment of the claim.
The debtor may keep the collateral that secures a particular claim if the plan provides for the holder of the secured claim to receive at least fifty percent of the value of such collateral. Unsecured debt need not be paid in full, provided the debtor pays all projected disposable income over the applicable commitment period. They must also receive at least the amount they would have received if the assets were liquidated.
The duration of your Chapter 13 bankruptcy depends on your individual circumstances, but your bankruptcy attorney will help you determine an accurate estimation. The average case lasts between three and five years, and if you are able to clear all your debt before that, it will give you the opportunity to get out of bankruptcy early.
Nobody knows what the future holds. Sometimes, negative circumstances force people to renege on their Chapter 13 bankruptcy repayment plan. This can happen if you experience a health emergency or if you lose your job, or if another issue renders you unable to keep up your payments. Bankruptcy courts are aware of these issues and have put special provisions in place to handle circumstances beyond your control.
When you're faced with trying circumstances, your assigned bankruptcy trustee will review your case, and possibly modify the plan, taking your changed situation into account. In severe cases of hardship, the bankruptcy court may decide to fully discharge your debts. Alternatively, you may be able to convert to a Chapter 7 bankruptcy, whereby a court-appointed trustee can sell your disposable assets and use the proceeds to repay some of your debts.
If you are unable to meet the obligations of your repayment plan, it is a good idea to speak to your attorney, who will help you assess your situation and help determine a new way to handle your debt.
In order to emerge from Chapter 13 bankruptcy, you must show that:
- All your child support and alimony payments are up-to-date;
- All the debts under the repayment plan are repaid;
- You have completed the court-approved counseling course.
Once you have met all the conditions laid out above, you may be discharged from the Chapter 13 bankruptcy.
Chapter 13 and Prior Bankruptcies
There is a 8 year time limit between filing Chapter 7, but you can file for a chapter 13 bankruptcy even after you have experienced a Chapter 7 bankruptcy discharge less than eight years ago.
Debtors often file a Chapter 7 to help discharge dischargeable debts, and subsequently file Chapter 13 to help repay those debts that are not dischargeable in Chapter 7. This is known as Chapter 20 (7 + 13), however, this approach may be limited by provisions 2005 amendments that allow a discharge in subsequent Chapter 13 only after a specified time has passed. Once the plan ends, you have an opportunity to start rebuilding your credit score.
One of the main benefits of filing for bankruptcy, is the fact that it puts into effect an automatic stay, which stops creditors from harassing you in their attempts to collect payments. It can even halt foreclosure proceedings and stop them from calling your home and garnishing your wages. However, you should note that an 'automatic' stay can be lifted for a variety of reasons, including the refiling of a case within a year of the prior case.
Getting Help with a Chapter 13 Filing
Bankruptcy has many variables, but an experienced San Diego Bankruptcy Attorney can help navigate the process successfully. Opting for a Chapter 13 bankruptcy gives you time to catch up on overdue payments over time, until you can reinstate your original agreement. It may help you to keep your valuable nonexempt property and get rid of those pesky calls.
Call 619-488-6168 today to get in touch with an experienced bankruptcy lawyer ho can help you out. Schedule an initial case assessment today and find out exactly where you stand and what your rights are.