When debts become overwhelming, many people seek one of two types of bankruptcy for relief, depending on their income and needs. For instance, people with little income remaining at the end of each month and minimal assets usually choose to file for Chapter 7 bankruptcy, the chapter that wipes out (discharges) qualifying debt in four to six months without the need to repay creditors. By contrast, people who earn a significant income or who want to protect valuable property will file for Chapter 13 bankruptcy. In exchange for debt relief, these filers pay their discretionary income to their creditors over the course of a three- to five-year repayment plan. In this article, you’ll learn about how the overall Chapter 13 process works.
Chapter 13 Eligibility In Utah
Chapter 13 bankruptcy isn’t for everyone. Here are a few requirements you should know upfront.
• Debt limits: Secured debts and unsecured debts cannot exceed certain amounts. A secured debt gives a creditor the right to take property (such as your house or car) if you don’t pay the debt. An unsecured debt (such as a credit card or medical bill) doesn’t give the creditor this right. If your total debt burden is too high, you’ll be ineligible, but you can file an individual Chapter 11 bankruptcy, instead.
• Steady income: When you file a Chapter 13 case, you’ll have to prove to the court that you can afford to meet both your monthly household obligations and pay into a repayment plan. If your income is irregular or too low, the court won’t confirm (approve) your proposed repayment plan.
The Chapter 13 Process
Filing and completing a Chapter 13 bankruptcy case is far more complicated than Chapter 7 bankruptcy. Here’s a snapshot of the process.
Mandatory Courses and Filing Fees In Utah
When you file your official bankruptcy forms with the court clerk, you’ll pay a bankruptcy filing fee and present a certificate demonstrating that you received the mandatory credit counseling education from an agency approved by the United States Trustee’s office. The session helps evaluate whether you have sufficient income to repay your creditors. You’ll take a second “debtor education” course after filing your case. You should expect to pay a fee of between $25 and $35 per course because while providers must provide counseling for free or at reduced rates if you cannot afford to pay, Chapter 13 filers rarely qualify for the discount. You’ll find a list of approved credit counseling and debtor education agencies on the U.S. Trustee’s website.
The Chapter 13 Repayment Plan In Utah
The central part of your Chapter 13 case is the repayment plan that you’ll propose to your creditors and the court. Amongst other things, the plan must take into account each of your debts. You’ll use either the official plan form or your court’s local form, depending on where you file. Your creditors and the bankruptcy trustee will have an opportunity to object to your plan. If you’re able to make changes to everyone’s satisfaction, the court will likely approve (confirm) your plan at the confirmation hearing. You won’t wait until plan confirmation to start paying your monthly payment, however. Your payments will begin the month after you file.
The Bankruptcy Confirmation Process
The various bankruptcy chapters provide a filer with two types of bankruptcy relief: liquidation and reorganization. In a Chapter 7 bankruptcy, the bankruptcy trustee; the official tasked with overseeing the case—will sell nonexempt property (property that the debtor can’t keep) and distribute it to creditors. By contrast, in a Chapter 11 or Chapter 13 reorganization, the trustee doesn’t sell the debtor’s property. Instead, the debtor must develop a plan to repay creditors over a period of time. Most plans will include provisions that allow the debtor to pay creditors less than the amount owed. Before the plan goes into effect, the bankruptcy court must approve or confirm it at a confirmation hearing. Creditors will have an opportunity to object to the plan beforehand.
If there are no objections, the judge will confirm the plan if it meets the following elements:
• the plan is feasible (for instance, the debtor has enough income to pay the creditors as provided)
• the debtor proposed the plan in good faith (the debtor isn’t trying to manipulate the bankruptcy process), and
• the plan complies with bankruptcy law.
After confirmation in a Chapter 13 case, the debtor must complete the three- to five-year repayment plan before any debts get wiped out. By contrast, discharge of debt is immediate after a Chapter 11 confirmation. The confirmation creates new contracts between the debtor and creditors. Both Chapter 11 and Chapter 13 cases can be difficult to complete successfully. Debtors in Chapter 11 cases must be represented by an attorney. Although it’s possible to represent yourself in a Chapter 13 case, doing so is rarely successful, and most courts encourage filers to retain counsel.
Here are some examples of debts you’ll repay in Chapter 13 bankruptcy.
• Priority debt: Your Chapter 13 plan must pay certain debts; called priority claims—in full. Priority claims include child support and alimony arrearages, and most tax obligations.
• Secured debt: If you want to keep a car or house, you’ll have to continue to pay your regular payment on the car loan or mortgage. Whether you’ll have to pay these amounts as part of your plan will depend on your local court. If you’re behind on payments, you’ll have to repay the arrearages in your plan.
• Unsecured debt: The plan must apply your disposable income (the amount remaining after paying secured and priority debt, as well as allowed living expenses) toward unsecured debts, such as credit card balances and medical bills. You don’t have to fully repay these debts, or even pay them at all, in some cases. You just must show that you are putting any remaining income towards their repayment.
• Value of nonexempt property: You’re allowed to keep all of your property in a Chapter 13 bankruptcy if you can afford to do so. You’ll have to pay the value of any property that you can’t protect with an exemption through your plan.
Although the repayment length will depend on how much you earn, most filers will have a five-year plan. The only exception is that a three-year plan is available to people who qualify to file a Chapter 7 case but choose to file a Chapter 13 bankruptcy instead, perhaps to save a house or car, or to pay off a priority debt, such as child support arrearages or taxes. Even so, because the monthly payment will often be significantly lower over five years, it’s common for filers to opt for the more extended plan—primarily because it increases the likelihood that the court will confirm the plan.
If You Can’t Make Plan Payments
A lot of financial changes can occur over the course of your plan. But that doesn’t mean you’re out of the plan automatically. If, for example, your income decreases, you might be able to modify the amount being paid to your unsecured creditors. If, however, you can’t pay a required debt, the court might let you discharge your debts due to hardship. Examples of hardship would be a sudden plant closing in a one-factory town or a debilitating illness. If neither options are feasible, you might be able to convert (switch) to a Chapter 7 bankruptcy. Keep in mind, however, that there’s a good chance that you’d lose your nonexempt property. The other option is to dismiss your Chapter 13 bankruptcy case. The downside to this approach is that you would still owe your outstanding debt balance, plus any interest creditors didn’t charge during your Chapter 13 case.
Required Information to Submit When Filing Chapter 13
To complete your petition, you must collect the following information:
• Your assets and liabilities
• Statement of monthly net income
• Current bills and expenses
• Current leases or contracts
• Financial statements
• Proof of completing credit counseling
• Your debt repayment plan
• Income from employers for the last 60 days (if any)
• Federal or state qualified education or tuition accounts
• Tax returns (usually for the past two years)
Even if you file as a married couple, both spouses need to gather their information for income, expenses, or anything that is not shared. If just one person files, the spouse still has to submit their information so the courts can accurately evaluate your household income and expenses.
Qualifying for Chapter 13 Bankruptcy
The benefit of this chapter is that you repay some of your debts but usually not all over the course of a three- to five-year repayment plan. But before the court confirms (approves) your plan, you must fill out the official bankruptcy paperwork and prove that you are:
• up-to-date on tax filings
• within debt amount limitations
• employed and have enough income to cover the required monthly payment, and
• an individual, not a business (however, all financial aspects of a sole proprietor’s business get included in the bankruptcy).
Your Income Tax Filings Must Be Current
To file for Chapter 13, you will have to submit proof that you filed your federal and state income tax returns for the four tax years prior to your bankruptcy filing date. If you need some time to get current on your filings, the court can postpone the proceedings (but you don’t want to count on this). Ultimately, however, if you don’t produce your returns or transcripts of the returns for those four years, your Chapter 13 case will be dismissed.
You Must Have Sufficient Disposable Income
To qualify for Chapter 13, you will have to show the bankruptcy court that you will have enough income, after subtracting certain allowed expenses and required payments on secured debts (such as a car loan or mortgage), to meet your repayment obligations. Your plan must pay back certain debts in full, or the judge will not confirm (approve) it and allow you to proceed.
You can use the income from the following sources to fund a Chapter 13 plan:
• regular wages or salary
• income from self-employment
• wages from seasonal work
• commissions from sales or other work
• pension payments
• Social Security benefits
• disability or workers’ compensation benefits
• unemployment benefits, strike benefits, and the like
• public benefits (welfare payments)
• child support or alimony you receive
• royalties and rents, and
• proceeds from selling property, especially if selling property is part of your primary business property.
If you are married, your income does not necessarily have to be “yours.” A nonworking spouse can file alone and use money from a working spouse as a source of income. And an unemployed spouse can file jointly with a working spouse.
Why File for Chapter 13 Bankruptcy?
It’s true that many people prefer to file for Chapter 7 bankruptcy because it doesn’t require the filer to pay back creditors. But some debtors simply don’t qualify. Others, however, choose to file for Chapter 13 bankruptcy because it provides options that Chapter 7 doesn’t offer, making a Chapter 13 case the better choice.
Here’s a list of common reasons a debtor might file a Chapter 13 case:
• A debtor whose income exceeds the Chapter 7 means test maximum isn’t eligible to receive a Chapter 7 discharge and wipe out qualifying debt.
• A homeowner who is behind on a mortgage payment can pay the arrearages over three to five years and keep the house (the same holds true for an overdue car payment).
• A debtor can prevent a collection action such as a wage garnishment while paying off a tax bill, overdue support, or other non-dischargeable debt in a repayment plan.
• A debtor can keep nonexempt property that would otherwise get sold in a Chapter 7 bankruptcy (but the debtor will need to pay for the nonexempt portion in the three- to five-year repayment plan).
You won’t qualify for Chapter 13 bankruptcy if your secured and unsecured debt exceeds certain amounts. A debt is secured if you stand to lose specific property if you don’t make your payments to the creditor. Home loans and car loans are the most common examples of secured debts. But a debt might also be secured if a creditor such as the IRS—has filed a lien (notice of claim) against your property. An unsecured debt doesn’t give the creditor a right to take a particular piece of property. Most debts are unsecured, including credit card debts, medical and legal bills, back utility bills, and department store charges.
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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