Many people think of bankruptcy court as the final stop on a path to financial ruin, the only option left when repaying debts seems impossible. But there’s hope even in bankruptcy, and Chapter 13 of the federal bankruptcy code offers the closest thing to a soft landing. Chapter 13 allows those with enough income to repay all or part of their debts as an alternative to liquidation. It’s bankruptcy for those whose biggest problem is dealing with creditors’ demands for immediate payment, not lack of income. One of its most attractive features is the chance to keep your home after Chapter 13 bankruptcy as long as you can pay the mortgage and any amount required by your Chapter 13 repayment plan.
Under Chapter 13, people have three to five years to resolve their debts while applying all their disposable income to debt reduction. The option allows applicants to eliminate unsecured debts while catching up on missed mortgage payments. Short-circuiting home foreclosure is one of the option’s most attractive features. Though keeping your home can be a major relief, you’re required to spend years living under the supervision of a court-appointed trustee who will collect and distribute your payments.
How Chapter 13 Works
Chapter 13 bankruptcy is like Chapter 11, which generally applies to businesses. In both cases, the petitioner submits a reorganization plan that safeguards assets against repossession or foreclosure and typically requests forgiveness of other debts. They both differ from the more extreme Chapter 7 filing, which liquidates all assets except those specifically protected. No bankruptcy filing eliminates all debts. Child support and alimony payments aren’t dischargeable, nor are most student loans and some types of taxes. But bankruptcy can clear away many other debts, though it will likely make it harder for the debtor to borrow in the future.
To be eligible to file for Chapter 13 bankruptcy, an individual must have no more than $419,275 in unsecured debt, such as credit card bills or personal loans. They also can have no more than $1,257,850 in secured debts, which includes mortgages and car loans. These figures adjust periodically to reflect changes in the consumer price index. One of Chapter 13 allows you to stop an effort to foreclose on your home. Filing a Chapter 13 petition suspends any current foreclosure proceedings and payment of any other debts owed. This buys time while the court considers the plan, but it does not eliminate the debt. Hopefully, the bankruptcy plan will free enough of your income that you’ll be able to make regular mortgage payments and keep your house.
The Chapter 13 Process
First, you should find a bankruptcy lawyer who can provide you with a free evaluation and estimate to file. The cost to file Chapter 13 bankruptcy consists of filing fees and fees charged by a bankruptcy attorney.
Petitioners (or “debtors”) need to pay a $313 filing fee to the bankruptcy court. They also need to provide:
• A list of creditors and the amount of their claims
• Disclosure of the amount and sources of the debtor’s income
• A list of the debtor’s property, as well as an accounting of all contracts and leases in the debtor’s name
• A breakdown of the debtor’s monthly living expenses
• Tax information, including a copy of the debtor’s most recent federal tax return and a statement of any unpaid taxes.
Chapter 13 petitioners must stipulate that they haven’t had a bankruptcy petition dismissed in the 180 days before filing due to their unwillingness to appear in court. Also, anyone seeking bankruptcy protection must undergo credit counseling from an approved agency within 180 days of filing a petition. Shortly after filing bankruptcy, the debtor also must propose a repayment plan. A bankruptcy judge or administrator will hold a hearing to determine whether the plan meets the requirements of the bankruptcy code and is fair. Creditors may raise objections to the plan, but the court has the final say.
Debtors can arrange to make up delinquent payments over time, but under Chapter 13 rules, all new mortgage payments from the time of filing must be made on time. The debtor also must work with a trustee, who distributes payments to the creditors. The debtor is not required to have any direct contact with his or her creditors under Chapter 13. In fact, all creditors are required by law to cease any attempts to recover the debts covered under the Chapter 13 process if all terms of the agreement are being met. You must stick to the basics of your Chapter 13 repayment plan. If you make late payments or miss payments, the trustee may move to dismiss your case. In some cases, you may be allowed to accelerate your payments and seek an early discharge from the agreement. Conversely, if your financial situation worsens, it’s up to you to inform the bankruptcy trustee and seek a modification of the plan, if necessary. Failure to comply with the terms, especially failure to make payments on time, could result in your Chapter 13 case being dismissed.
Businesses, such as corporations and LLCs, cannot file Chapter 13. The bankruptcy code also prohibits stockbrokers and commodity brokers from filing under Chapter 13, even if their debts are personal. Individuals who can demonstrate they have the means to pay regular monthly payments are eligible to file. They must disclose their sources of income and submit the information to the court within 14 days of filing a petition.
Income can come from a variety of sources, including pension income, Social Security payments, unemployment compensation, royalties and rent and proceeds from a property sale. You also need to be current in you tax filings. You are required to submit proof that you filed state and federal tax returns for the past four years. If you can’t do this, your case can be delayed until you can, and will be dismissed if you are unable to produce or offer transcripts of your returns. The trustee will review the debts and income statements, and then schedule a hearing to decide whether the plan is acceptable. When the repayments are completed, the Chapter 13 case will be discharged. This typically takes three to five years.
Typical Chapter 13 Bankruptcy Case
What does a successful Chapter 13 bankruptcy applicant look like?
Consider Steven and Cathy, a married couple with a home that carriers a $150,000 mortgage. Steven works, Cathy doesn’t, but they file jointly for Chapter 13 protection. The couple also owes $7,000 on a car loan and has nearly $20,000 in credit card debt.
Two weeks after filing a petition, they submit a Chapter 13 repayment plan that shows how Steven’s income can be used to make mortgage and car payments, and can repay part of the unsecured credit card debt. Their plan includes three categories of debt: priority, secured and unsecured. Priority claims, which must be fully paid, include the cost of the bankruptcy proceeding, some taxes and child support. Secured debts are those with collateral, like a house or a car, also must be paid in full (unless an exception applies) according to the bankruptcy plan. Repayment of unsecured debts, like money you owe on credit and charge cards, is flexible. The judge will review your income and the length of the repayment plan, and then decide how much you’ll owe your unsecured creditors. The amount could range from nothing to complete repayment.
For Steven and Cathy, this means paying all the court costs and whatever back taxes they might owe. It also means they will become current on their mortgage and car payments. But the judge will decide how much they’ll need to pay the credit card companies. Once their plan is accepted, the couple will begin making payments to a court-appointed trustee who will be responsible for monitoring their progress and conveying the money to the creditors.
Chapter 7 vs. Chapter 13
Chapter 7 bankruptcy forces you to liquidate a great many assets to repay creditors. But the process can be concluded relatively quickly, and any wages and property you acquire after the bankruptcy filing, except inheritances, aren’t subject to distribution to your creditors. Typically, the entire process is completed within six months. But Chapter 7 has disadvantages, too.
Lenders who have already filed to foreclose on your home are only temporarily stalled, and other debts such as mortgage liens can be collected after the case is concluded. Cosigners on your debt are still obligated to pay. In addition, you have to meet the Chapter 7 income limit to qualify. Seeking Chapter 13 protection allows you to keep all your property. It simply extends the amount of time you have to repay what you owe after the bankruptcy court issues its ruling. It is possible to file a Chapter 13 bankruptcy after a Chapter 7 is completed, allowing you to seek a reduction in whatever debts remain from a Chapter 7 discharge.
Chapter 13 also protects your loan cosigners against collection efforts if the bankruptcy settlement obligates you to repay the debt yourself. If you need to file a second bankruptcy, Chapter 13 is only a two year waiting period versus eight years for Chapter 7. There are disadvantages to Chapter 13 bankruptcy as well. Legal fees can be higher in Chapter 13 cases than Chapter 7 cases and your obligation to repay can last for years. In Chapter 7, the Chapter 7 discharge ends most debt obligations.
Life after Chapter 13 Bankruptcy
Once the court approves a repayment plan, it is up to the debtor to make the budget plan work. Failure to make agreed-upon payments will bring the matter back to court for further review, which could include selling the debtor’s property to pay debts. Alternatively, the trustee can simply request the case be dismissed.
Bankruptcy may give debtors a breather from creditors, but there is a penalty to be paid on their credit reports. Under the federal Fair Credit Reporting Act, a Chapter 13 bankruptcy will be listed on the report for seven years. Debtors in this situation may find it difficult to get additional credit for years. Chapter 13 bankruptcy can be a useful financial tool for people with serious debts who worry about losing their homes to bankruptcy. Anyone considering this course should consult a bankruptcy lawyer.
Before Filing a Bankruptcy Petition
Though bankruptcy filings are sometimes the best way to resolve debts, they are not the only alternative. Before deciding if you should file for bankruptcy, consider steps to resolve your debt. Then speak with an attorney to determine if bankruptcy is right for you. Each of these alternatives has its own set of pros and cons and only an attorney can advise you as to the best course of action in your particular case.
• Credit Counseling – Seek help from a nonprofit credit counselor. Churches, charitable organizations and government agencies might provide counseling without charge, or they can refer you to a counselor. The goal is to review your finances and suggest solutions for your debt.
• Debt Management – The next step is to visit a nonprofit credit counseling firm that can devise a specific plan for managing debt. A plan might consider which debts to pay first and detail how your income will be applied to debt. You can meet with debt managers personally or use online tools to set goals and create a plan. The plan might involve establishing a repayment pecking order, having you focus on paying down high-interest debts first while making minimum payments on other debts. Debt management plans also take 3-5 years to complete.
• Debt Consolidation: Some firms will, for a fee, work with your creditors to devise a debt consolidation plan. If you owe balances on multiple credit cards, a debt consolidator will create a plan that allows you to make a single monthly payment which will then be used to repay what you owe.
• Debt Settlement: As a final step to remediate debt problems and avoid bankruptcy, a nonprofit debt settlement firm negotiates with creditors to reduce what you owe in exchange for a workable payment plan that you commit to. Though this strategy is hardly foolproof, creditors sometimes are willing to take reduced payments if they know they can recover part of what they’re owed.
Chapter 13 Eligibility
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. (Find the figures in What Are Chapter 13 Bankruptcy Debt Limitations?) 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.
• Not a business: This chapter isn’t available to companies, meaning that only an individual can file for Chapter 13 bankruptcy. However, business-related debts that you’re personally responsible for will be part of your plan, and therefore, from a practical standpoint, a sole proprietorship might be able to benefit from this chapter.
Bankruptcy is a federal court process designed to eliminate debts or repay them under the protection of the bankruptcy court. For individuals, most people file either Chapter 7 or Chapter 13, because a court order can call an automatic stay, prohibiting most creditors from hounding you in order to collect what you owe. However, you should consider the costs, both financially and personally, before taking action. If you declare bankruptcy, renting an apartment or buying a house or a car will be extremely difficult because of your credit. In addition, future job opportunities could be compromised, perhaps leading to more financial issues.
Many debtors assume that Chapter 7 bankruptcy is better than Chapter 13 bankruptcy because, Chapter 13 bankruptcy requires debtors to repay some debt, whereas Chapter 7 bankruptcy wipes out qualifying debt without a repayment plan. But it isn’t that simple.
For instance, Chapter 7 is quicker, many filers can keep all or most of their property, and filers don’t pay creditors through a three to five years Chapter 13 repayment plan. But not everyone qualifies to file for Chapter 7 bankruptcy and in some cases; Chapter 7 doesn’t provide the help the filer needs. Each bankruptcy chapter has unique tools that help solve distinct problems. For instance, a debtor who’d like to save a home from foreclosure will likely be better off filing for Chapter 13 bankruptcy because Chapter 7 bankruptcy doesn’t have a mechanism that will allow you to keep property when you’ve fallen behind on your payment. However, sometimes Chapter 13 bankruptcy is the only option because a debtor isn’t eligible for Chapter 7 bankruptcy.
Some debtors cannot file for Chapter 7 bankruptcy leaving Chapter 13 bankruptcy as the only option. You cannot file for Chapter 7 bankruptcy if both of the following are true:
• Your current monthly income over the six months before your filing date is more than the median income for a household of your size in your state.
• Your disposable income, after subtracting certain expenses and monthly payments for debts you would have to repay in Chapter 13 bankruptcy, exceeds certain limits set by law. These calculations are referred to as the means test. They determine whether you have the means to repay a certain amount of your debt through a Chapter 13 repayment plan. If you do, you flunk the test and are ineligible for Chapter 7 bankruptcy.
The means test can get fairly complex, and, to make matters worse, uses unique definitions of disposable income, current monthly income, expenses and other important terms, which sometimes operate to make your income seem higher, and your living expenses lower, than they are. Even if you are eligible for Chapter 7 bankruptcy, there are some situations when filing for Chapter 13 bankruptcy might be more advantageous than filing for Chapter 7 bankruptcy.
How the Automatic Stay Works
The automatic stay is an order that’s put in place as soon as you file for bankruptcy. All collection efforts to collect money you owe other than child support and alimony, including calls, letters, and other techniques, must come to an immediate halt. It stops almost anyone who is trying to collect from you.
A few things that a creditor cannot do once the stay is in place include:
• garnishing your wages (taking money out of your paycheck)
• levying on your bank account (instructing the bank to withdraw funds)
• foreclosing on your house
• repossessing your car, or
• Moving forward with a civil lawsuit requesting a money judgment.
In most cases, the automatic stay will protect you throughout your case. But not always. If you’ve filed more than one bankruptcy case within a year, you might not receive as much or any protection. Depending on the number of times you’ve filed during the previous year, the stay could be limited to 30 days (you filed one other matter) or might not apply at all (you filed two or more cases). If you find yourself with this problem and want the protection of the stay, you’ll have to file a motion asking the court to extend it or put it in place. The court will consider doing so if you explain why you filed the previous case and demonstrate that you aren’t gaming the system by repeatedly filing for bankruptcy.
Also, it’s common for a creditor to file a motion to lift the automatic stay (a motion to remove the stay order) if, in a Chapter 13 case, you stop making your house payment and the creditor wants to move forward with a foreclosure. If the court grants the request, the judge will withdraw the stay order and allow the creditor to continue with collection efforts.
Advantages of Chapter 7 Bankruptcy
Chapter 7 bankruptcy is an efficient way to get out of debt quickly, and most people would prefer to file this chapter, if possible. Here’s how it works:
• It’s relatively quick: A typical Chapter 7 bankruptcy case takes three to six months to complete.
• No payment plan: Unlike Chapter 13 bankruptcy, a filer doesn’t pay into a three- to five-year repayment plan.
• Many, but not all debts get wiped out: The person filing emerges debt-free except for particular types of debts, such as student loans, recent taxes, and unpaid child support.
• You can protect property: Although you can lose property in Chapter 7 bankruptcy, many filers can keep everything that they own. Bankruptcy lets you keep most necessities, and, if you don’t have much in the way of luxury goods, the chances are that you’ll be able to exempt (protect) all or most of your property.
• You can keep a house or car in some situations. You can also keep your house or car as long as you’re current on the payments, can continue making payments after the bankruptcy case, and can exempt the amount of equity you have in the property.
Chapter 7 works very well for many people, especially those who:
• own little property
• have credit card balances, medical bills, and personal loans (these debts get wiped out in bankruptcy, and
• Whose family income doesn’t exceed the state median for the same family size.
You’ll take the means test to see if your income qualifies for this chapter. If your income is below the average income for a family of the same size in your state, you’ll automatically qualify. If your income is higher than the median, you’ll have another opportunity to pass. However, if after subtracting allowed expenses, including payments for child support, tax debts, secured debts (such as a mortgage or car loan), you have income left over to make a significant payment to your creditors (called disposable income), you won’t qualify to file for Chapter 7 bankruptcy.
Chapter 7 bankruptcy isn’t the best choice for everyone. Chapter 7 won’t help people whose debts won’t get wiped out (discharged), like certain income tax debt, student loans, and domestic support obligations. High-income filers find it hard to qualify. It’s also not a good fit for people who would lose substantial equity in a home or other property if they filed for Chapter 7 bankruptcy, or those facing foreclosure or repossession. For those individuals, Chapter 13 bankruptcy would likely be a better choice.
Disposable income is the amount that remains after subtracting allowed bankruptcy expenses from your monthly gross income. Your disposable income will determine whether you qualify to discharge (wipe out) debt in Chapter 7 or Chapter 13 bankruptcy. When you claim your deductions, you’ll be able to use the actual cost of some expenses. For others, such as the allowance for food, clothing, and housing, you’ll use the national and local standards.
Here’s a list of some of the deductions you’ll be allowed to take:
• food and clothing
• housing and utilities
• transportation costs
• involuntary payroll deductions
• life insurance
• court-ordered payments, such as family support
• certain education costs
• childcare expenses, and
• Health care costs.
In a Chapter 7 case, you’ll complete the Chapter 7 Means Test Calculation form. You’ll deduct allowed expenses to find your disposable monthly income. Next, you’ll multiply that amount by 60 months. If the figure exceeds the maximum amount currently allowed (which will be listed on the form), you won’t qualify for a discharge. Additionally, you might not qualify if your disposable income is sufficient to pay 25% or more of your unsecured, no priority debt (such as credit card balances, medical bills, and personal loans).
In a Chapter 13 matter, you’ll fill out the Chapter 13 Calculation of Your Disposable Income form. The amount that remains after deducting expenses is your monthly disposable income. You’ll pay that number to your unsecured, non-priority creditors each month over the course of your three- to five-year repayment plan. Because each case is different, determining whether you qualify for bankruptcy can be challenging. When in doubt, contact a knowledgeable bankruptcy attorney.
Here are a few other things filers find challenging about Chapter 13 bankruptcy:
• You must complete the entire three- to five-year repayment plan before any qualifying debt balances get wiped out (unless the court lets you off the hook early for hardship reasons).
• If you owe non-dischargeable past due taxes, or support arrearages, you’ll have to pay off the entire balance in your plan (many people don’t have sufficient income to do so).
• To keep a house or car, you’ll need to repay the arrearages over the course of your plan (while continuing to pay your regular monthly payment).
• Many people who file for Chapter 13 bankruptcy don’t complete their plans, so filers run a very real risk that their debts won’t be discharged.
Despite these potential problems, Chapter 13 bankruptcy is a good option for people who have a regular income to pay into a repayment plan, and who would otherwise lose their house to foreclosure or who need time to pay back tax or support arrearages.
The Chapter 7 Bankruptcy Process
You’ll fill out several forms listing your income, assets and debt. You have to list everything, or it might not be erased and may even be considered an act of fraud. You’ll then pay a fee to file a petition for bankruptcy court and a date will be set. The petition automatically prevents creditors from garnishing your wages or suing you. Your creditors will be informed and you’ll receive a court-appointed trustee to oversee the process.
About a month after you file, you’ll attend a hearing in which creditors can view your debt and the trustee will arrange to sell off your nonexempt items. Depending on the state you live in, you could lose your second home, second car, stock or bond certificates, certificates of deposit, heirlooms and any valuable collections such as coins or stamps.
After that, you will not have to pay dischargeable debt, which includes late rent and utility bills, credit cards, medical bills and documented loans from friends and family. By law, creditors cannot try to collect from the original debt. However, some non-dischargeable debts may still exist, and if creditors deem them fraudulent, you can still be approached by collection agencies.
The petition creates a separate, taxable bankruptcy estate consisting of all assets that belonged to you before you filed. Your trustee is responsible for preparing and filing taxes attached to the estate, but you’re responsible for taxes not connected, such as income tax Remember, Chapter 7 stays on your credit for 10 years.
The Chapter 13 Bankruptcy Process
You’re only required to make one monthly payment to your trustee, who will distribute the funds to the various creditors. They are paid based on priority (tax authorities, child support/alimony and administration costs). Lenders are then paid, followed by credit card companies, medical providers, utilities and more. Just like Chapter 7, you’ll fill out the same papers, pay a fee and receive a court-appointed trustee. You have to submit a plan for repayment, which the court can either accept or reject.
After you have filled out a form listing your assets and income and set up a confirmation hearing, your trustee will begin making payments to your creditors based on the court-approved repayment schedule.
You’ll pay back your debts from your own income, and if some survive after your bankruptcy is closed, you have to keep paying back those debts. The petition does not create a separate taxable estate, so you’ll continue to pay taxes just like you did before you filed.
Difference Between Chapter 7 And Chapter 13 Bankruptcy
Before you decide which type of bankruptcy is best for you, it’s important to understand the differences between the two.
• Certain assets can be liquidated to pay off outstanding debts.
• Could be completed in as little as three or four months.
• Once complete, no further payments need to be made by the consumer.
• Stays on a credit report for 10 years.
• Income must be less than the median income in your state.
• You’ll receive a court-approved debt repayment plan. The amount you must repay depends on your income and the size of debt.
• There is no liquidation of assets, which means you keep everything, including your home and car, all while making regular payments.
• The entire process can take three to five years to complete.
• Stays on your credit report for seven years.
Requirements when Filing Chapter 7 or Chapter 13
If you’re considering either Chapter 7 or Chapter 13 bankruptcy, there are certain income requirements that must be met. Anyone contemplating Chapter 7 bankruptcy must go through what’s called a means test. This will assess whether you meet the necessary conditions to qualify. The first part of the Means Test is to figure out if your income is below the median income level in the state where you reside. If it is, then you pass and are eligible for Chapter 7 bankruptcy. However, if your income is above the median level, a deeper look into your disposable income is required. If your disposable income equals more than a predetermined amount, the courts will assume you have enough money to at least pay part of your debt and you won’t pass the means test. Anyone who fails the means test will be required to file for Chapter 13 bankruptcy protection.
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