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What is Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy is ideal for individuals who are in need of debt relief, but want to protect some forms of assets or property they own from being reached by creditors. A person may also be forced to file for Chapter 13 Bankruptcy when their income is too high to file for Chapter 7 Bankruptcy, or if a court orders them too.
Although Chapter 7 and Chapter 13 Bankruptcy proceedings are both meant to aid individuals who are in need of debt relief (as opposed to businesses), there are a few differences between the two. The first is that Chapter 13 Bankruptcy does not necessarily eliminate debts. Instead, it aims to reorganize the debt in a way that makes it manageable to pay off over a longer period of time (usually within three to five years).
On the other hand, Chapter 7 Bankruptcy can completely eliminate debts. The trade-off here, however, is that it provides almost no protection over the majority of a person's assets. Thus, an individual who can afford to restructure their debt to eventually pay it down over a longer period of time, may use Chapter 13 as a strategy to protect their property and/or assets.
Again, a federal bankruptcy court may order an individual who originally filed for Chapter 7 to file for Chapter 13 when it determines that an individual has the ability to repay a debt. A court may also order such a switch if a person failed to disclose a significant amount of funds or received a sudden increase in their income (e.g., inheritance, promotion, etc.).
Finally, if you are unsure of which chapter of bankruptcy you qualify for or want to learn more about Chapter 13 Bankruptcy, you should speak to a local bankruptcy lawyer to obtain some more personalized legal advice.
A Chapter 13 bankruptcy is a reorganization form of bankruptcy. This option is usually for individuals with higher incomes and property they wish to protect from creditors that may be seeking to levy their assets.
A Chapter 13 bankruptcy permits the debtor to reorganize their debt and make affordable payments. There are some debts that may be discharged through the bankruptcy process. However, other debts are required to be paid in full within the timeframe of the bankruptcy payment plan.
There are several different factors that may impact how the debt is restructured or reorganized, including:
- The kind of debt the individual wants included. Some debts cannot be discharged, including:
- child support;
- student loans;
- federal, state, or local taxes;
- fines or penalties for breaking the law;
- alimony; and
- other specific debts.
- The type of relationship the debtor and the creditor have regarding the debt;
- The debtor's ability to pay off the amount within a reasonable time period; and
- The final determination of the bankruptcy judge regarding the debt.
How Long Is a Chapter 13 Bankruptcy Plan?
In general, the standard length of most Chapter 13 Bankruptcy Plans may last anywhere from three to five years. This means that the average debtor will need to make a schedule to repay down their debts before this time period expires. However, if a debtor requires more time to pay down their debts, they may request an extension from the bankruptcy court in which they submitted their original Chapter 13 filings.
How Do I Know If My Chapter 13 Plan Will Be Three or Five Years?
The amount of time that a debtor will have to pay off their Chapter 13 debts will depend on a number of factors, including the bankruptcy court's decision, the laws of the jurisdiction where the petition was submitted, the debtor's monthly income, and an estimation of how long it may take the debtor to pay down their remaining debt.
Similar to Chapter 7 Bankruptcy filings, Chapter 13 also applies the “means test” to assess the debtor's situation. The difference in a Chapter 13 Bankruptcy, however, is that in this instance it is used to figure out whether the debtor should be given three or five years to pay down all of their debts.
In most cases, a debtor will only be granted three years to pay off their debts if they earn less than the median family income level in their state. On the other hand, the length of time may be increased to five years if the debtor earns more than the state median income or if the debtor requests an extension from the court. A debtor may be able to modify their repayment plan if they can demonstrate they suffered some kind of financial setback or short-term issue.
Will the Judge Confirm My Chapter 13 Bankruptcy Plan?
In order for a debtor to increase their chances of getting a judge to confirm their Chapter 13 Bankruptcy Plan, they must demonstrate a few reasons why their plan is feasible first. Some factors that a court will consider in assessing how strong a plan is include the following:
- The first item that a judge will look at when reviewing a bankruptcy repayment plan is how realistic it is in succeeding. Although most courts are lenient when it comes to this requirement, no payment plans should exceed a debtor's expected amount of income.
- Next, the debtor must provide proof of all available income, including wages, loans from family or friends, and any other forms of payments that can be used to pay off their debts.
- Additionally, the plan must be proposed in good faith and must not violate any laws. If a debtor proposes to pay back a loan shark before they take care of their child support payments, then this plan would clearly not exhibit good faith intentions because it would violate a bankruptcy law concerning the priority of creditors.
- One other important factor that can significantly impact the chances of obtaining a court's approval is similar to the good faith requirement, but has to do with creditors. For instance, an unsecured creditor (e.g., a credit card company) cannot receive payments that are less than what they would have received if the debtor had filed for Chapter 7 Bankruptcy instead.
- As an example, if in a Chapter 7 Bankruptcy the credit card company would have been paid at least $500, then a debtor who filed for Chapter 13 Bankruptcy may not pay that credit card company less than $500 under their Chapter 13 repayment plan.
Will My Bankruptcy Case Get Dismissed If I Fall behind or Miss Payments on My Chapter 13 Plan?
A debtor may face many consequences if they miss or fall behind on their payments under a Chapter 13 repayment plan. For instance, their plan or case may not get confirmed by the time it gets to court. Chapter 13 proceedings take much longer than Chapter 7 cases.
In other words, it may be months until a court hears and rules on a Chapter 13 Bankruptcy petition. Thus, if a debtor misses payments under their plan before a court even confirms it, then the court may dismiss their case or object to their repayment plan.
Another consequence to missing or falling behind on payments is that the debtor's creditors may seek relief from a court's automatic stay.
For example, if a court grants a Chapter 13 Bankruptcy petition, it will place an automatic stay on creditors that prohibits them from collecting or harassing a debtor for overdue debts. By continuing not to repay creditors, the creditors can ask for relief from the court to lift the automatic stay, so they can continue collections on the debt.
Lastly, a debtor who defaults on their repayment plan may have their case dismissed. A default can trigger the bankruptcy trustee to ask the court to dismiss the case for failure to comply with the plan. If the court grants the bankruptcy trustee's request, then the court can dismiss the case without discharging any debts, meaning the debtor will still be on the hook for any remaining payments.
What Happens If I Can't Complete My Chapter 13 Plan?
In general, there are four main options available to a debtor who can't complete the Chapter 13 bankruptcy repayment. These options include:
- The federal bankruptcy court may dismiss the case or the debtor may ask the court to dismiss it. Unfortunately, this is the worst option that a debtor can choose because they may still be liable after months or years of repaying creditors.
- A debtor may request that the court discharge their debt. The court may grant this request if a debtor can demonstrate that certain circumstances beyond their control prevented them from completing their Chapter 13 repayment plan and that modification of the repayment plan would be impractical. This is true even in cases where the debtor never satisfies the requirements of their repayment plan.
- A debtor may also ask the court to modify their plan. If granted, the court may tweak either all of the plan or some parts of it, such as the amount of payments owed on certain debts, the length of time already spent on the plan, and/or the amount of payments that each individual creditor receives under the existing plan.
- Finally, in extreme cases, a court may convert the case to a Chapter 7 Bankruptcy. It is important to note that in this scenario a debtor may lose property or assets they were trying to protect under the Chapter 13 case, but ultimately, the case will be terminated quickly and many of the debts will be discharged.
How does Chapter 13 Bankruptcy Differ from Other Types of Bankruptcy?
There are several differences between Chapter 13 bankruptcy and other types of bankruptcies. For example, a Chapter 7 bankruptcy is a liquidation bankruptcy. In this type of bankruptcy, the debtor's eligible debts are discharged. However, they must liquidate some of their property and sell it to satisfy the debt.
A Chapter 11 bankruptcy usually involves a high cost to the debtor and is often exercised for corporations or companies who are attempting to reorganize their debt in order to become profitable again. An individual debtor may be forced to use a Chapter 11 bankruptcy instead of a Chapter 13 if their debts exceed a maximum amount.
A Chapter 12 bankruptcy is available if 80% of the individual's debt incurred is from operating a family farm or fishery. The farm may be classified as an individual, a corporation, or a partnership.
A Chapter 13 bankruptcy permits the debtor to retain their property and cease collection actions from creditors until they can establish a payment plan. This payment plan is created to satisfy most of the debtor's outstanding debt at an affordable amount for a set number of years, often between 3 and 5 years. However, if the debtor's debts exceed $1,184,200 or their unsecured debt exceeds $394,725, then they are not eligible for a Chapter 13 bankruptcy. This threshold may change.
Am I Eligible for Chapter 13 Bankruptcy?
There are several requirements an individual must satisfy in order to be eligible to file for Chapter 13 bankruptcy. These include:
- The debtor is an individual or a married couple. This includes individuals who operate an unincorporated business or are self-employed;
- The total secured debts do not exceed $1,184,200;
- The total unsecured debts do not exceed $394,725;
- The individual has not had a prior bankruptcy petition dismissed within the previous 180 days due to their failure to appear or comply with the court; and
- The individual has received credit counseling from an approved provider within 180 days of filing the petition.
Does Chapter 13 Bankruptcy Affect Child Support?
Filing for Chapter 13 bankruptcy will not get rid of your child support debt. However, it will help you organize your finances.
Child Support Does Not Get Discharged
Pursuant to public policy concerns, any current and overdue child support payments will not get discharged during a Chapter 13 bankruptcy. Child support debt is considered a priority debt, and will be repaid in full.
Chapter 13 Does Help to Repaid Back Child Support
Under Chapter 13 bankruptcies, the court will help you organizes your finances and set up repayment plans. Further, since back child support is considered a priority, the court will help you figure out how to repay that first. In essence, the court will help you free up your finances from claims by other creditors to allow you to be current with your child support payments.
Automatic Stay Affecting Child Support Payments
Despite child support being an exception to the automatic stay in bankruptcy proceedings, your child support obligations may be reduced. Unlike Chapter 7 bankruptcies, Chapter 13 bankruptcies make your current income part of the bankruptcy estate. Thus, you will have less money and and less of a financial obligation to pay child support. Essentially, your income is reduced and you will have less money that will be factored into child support payments.
Must Pay All Domestic Support before Receiving a Discharge
Under Chapter 13 bankruptcies, you can be discharged from your debt obligations. In order for that to happen, you must not owe any back child support or spousal support during your case.
What Do I Need to File a Petition for a Chapter 13 Bankruptcy?
In order to successfully file a petition for a Chapter 13 bankruptcy, it is important to have all documents completed correctly. It is also important that the documents contain all necessary relevant information. If an individual fails to include key information or forgets to include a form, they run the risk of delaying the bankruptcy process. The following is a list of what an individual should include in their bankruptcy petition:
- A list of all creditors including the amount owed to each and the nature of the debt;
- The source, frequency and amount of the individual's income;
- A list of all of property;
- Detailed list of all monthly expenses;
- The debtor must file a certificate of completion of the approved credit counseling; and
- A copy of the individual's recent tax return.
What Can I Expect After Filing My Petition for Chapter 13 Bankruptcy?
It is important to note that an individual's Chapter 13 bankruptcy is not automatic once they have correctly filed their petition. After filing a petition, the debtor can expect the following to occur:
- An automatic stay of collection activity occurs once the debtor has filed the petition. Following this automatic stay, debt collectors must stop contacting the debtor;
- Filing bankruptcy can give the debtor the opportunity to stop a foreclosure on their home and give them time to catch up on missed mortgage payments and back taxes;
- A trustee will be appointed to manage the bankruptcy case. The debtor will have to provide detailed information to them about the debtor's finances;
- A monthly payment plan that has been approved by the court will be put into place. Those payments may be deducted directly from the debtor's paycheck; and
- The debtor will have to give up their credit cards and stop using lines of credit to manage their expenses.
Are there any Negative Consequences to Filing Chapter 13 Bankruptcy?
Yes, there are negative consequences to filing a Chapter 13 bankruptcy. There are pros and cons of filing for bankruptcy. If a debtor is concerned about the potential consequences, they should consider the following before filing for a Chapter 13 bankruptcy:
- The debtor must comply with a strict budget during the life of the payment plan without the assistance of any lines of credit;
- Many individuals drop out of the payment program before finishing, so the debtor should make sure they are committed to the plan; and
- Filing bankruptcy can have a negative impact on the debtor's credit report for up to 10 years after filing.
What is a Forced Conversion Hearing?
After an individual files for a bankruptcy, the court may find that a different bankruptcy chapter applies instead. In those cases, a forced conversion occurs and the court changes the bankruptcy chapter to the appropriate one. For example, if the debtor filed for a Chapter 7 bankruptcy, the court may determine they have enough income to repay their creditors and may convert the bankruptcy into a Chapter 13 instead.
Should I Consult a Lawyer About Filing for Chapter 13 Bankruptcy?
It is essential to have the assistance of an experienced bankruptcy lawyer for any Chapter 13 bankruptcy issues you may face. If you are considering filing for bankruptcy, a lawyer can review your situation and determine if it is a good idea for you. If you have decided to file for bankruptcy, your attorney can help you determine which type you are eligible to file.
Your attorney will assist you in preparing all necessary documents, filing your bankruptcy petition, and will represent you during any court proceedings. It is important to consider the risks and benefits of bankruptcy prior to filing, and an attorney's advice is invaluable.
