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. Sometimes called the Wage Earner’s Bankruptcy, Chapter 13 allows those with enough income to repay all or part of their debts 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 Chapter 13’s most attractive features is the chance to keep your home as long as you can pay the mortgage under a settlement 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 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 student loans and unpaid 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 $394,725 in unsecured debt, such as credit card bills or personal loans. They also can have no more than $1,184,200 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 attorney 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. Applicants need to pay a $235 filing fee to the bankruptcy court, as well as a $75 miscellaneous administrative fee. 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 counselling from an approved agency within 180 days of filing a petition. Shortly after filing, 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 mediator, or 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 settlement. No late payments are permitted. You’ll be allowed to accelerate your payments, allowing you to 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 case being dismissed.
Bankruptcy Meeting Qualifications
Individuals who can demonstrate they have the means to pay down debts 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 your 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 bankruptcy court will review the debts and income statements, meet with creditors 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.
Bankruptcy 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. Co-signers on your debt are still obligated to pay. 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 co-signers against collection efforts if the bankruptcy settlement obligates you to repay the debt yourself. There are disadvantages as well. Legal fees can be higher in Chapter 13 cases than Chapter 7 and your obligation to repay can last for years. In Chapter 7, the settlement 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. 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 of only way to resolve debts, they are generally a final alternative. Before deciding if you should file for bankruptcy, consider steps to repair your debt.
• Credit Counselling: Seek help from a non-profit credit counsellor. Churches, charitable organizations and government agencies might provide counselling without charge, or they can refer you to a counsellor. The goal is to review your finances and suggest solutions for your debt.
• Debt Management: The next step is to visit a non-profit credit counselling 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 non-profit 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.
Are You Eligible for Chapter 13 Bankruptcy?
For many debtors, Chapter 13 bankruptcy is a good option. It has provisions that will allow an individual with regular income to repay some creditors less than the amount owed while keeping all assets, including a house and car. But not everyone is eligible.
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 proprietors 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 non-exempt property that would otherwise get sold in a Chapter 7 bankruptcy (but the debtor will need to pay for the non-exempt portion in the three- to five-year repayment plan).
Your Debts Might Be Too High
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.
Businesses Not Allowed in Chapter 13 Bankruptcies
A business cannot file for Chapter 13 bankruptcy in the name of that business. Businesses are steered toward Chapter 11 bankruptcy when they need help reorganizing their debts. (An exception exists, however: Although a sole proprietor cannot file in the name of the business, both business and personal debts are the responsibility of the individual, and therefore, are included in the bankruptcy filing. Therefore, Chapter 13 can effectively help reorganize a sole proprietors business.) You can, however, file for Chapter 13 bankruptcy as an individual even if you own a business. You’ll include business related debts for which you are personally liable in your Chapter 13 bankruptcy case. But, the business will remain liable for the debt. (Again, the result is different if you’re a sole proprietor both the individual and business debt liability will be handled by the bankruptcy.)
How to File for Chapter 13 Bankruptcy
You’ll disclose all aspects of your financial condition, including your income and expenses, assets, creditors, and previous transactions in the official bankruptcy paperwork. The case will start once you file your forms and other necessary items, such as a filing fee and proof that you completed a credit counselling class. You’ll have fourteen days to submit your Chapter 13 repayment plan unless you receive an extension from the court.
Chapter 13 Bankruptcy Lawyer
When you need a chapter 13 bankruptcy lawyer, please call Ascent Law LLC 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