Chapter 13 bankruptcy allows an individual to seek discharge of some debts while repaying others with disposable income. It is particularly useful for a debtor going through a financial crisis, helping to prevent property foreclosures or repossessions while repaying creditors over an extended amount of time.
Only individuals are eligible for relief under Chapter 13 bankruptcy, and they can have no more than $383,175 in unsecured debts and $1,149,525 in secured debts. These amounts are subject to periodic adjustments to reflect fluctuations in the Consumer Price Index, with the last such change taking place in May 2016.
People can't file for Chapter 13 relief if a prior bankruptcy petition was dismissed in the previous 180 days because they willfully failed to appear in court or did not adhere to court orders or if the petition was voluntarily dismissed because a secured creditor sought bankruptcy court relief to recover property subject to its lien. Additionally, individuals who wish to file for bankruptcy under any chapter must complete credit counseling with an approved agency within the preceding 180 days. There are exceptions, however, for emergency circumstances or when there aren't enough approved agencies in the debtor's area to provide the counseling.
After receiving counseling, the individual must file all court-required documents and details regarding his or her financial standing. They include:
They must also submit a certificate of completion for credit counseling and any debt repayment plan that they developed during this counseling.
Next, the court will appoint a trustee to oversee the process. The trustee will hold a meeting of creditors, during which the debtor answers finance-related questions from the creditors and trustee while under oath. Married couples who file jointly must both attend the meeting. Also during the meeting, the parties resolve issues with the repayment plan and ensure that everything is correct and complete before presenting it to a judge during a hearing.
An individual works with the credit counselor, trustee and creditors to develop a repayment plan based on the types of debts that are owed. Priority debts include most taxes and bankruptcy fees as well as domestic support, such as alimony and child support. Secured debts are those for which the creditors have the right to foreclose upon or repossess property. Unsecured debts are those for which the creditors don't have a lien against property.
The plan doesn't have to pay unsecured debts in full, but it must include payments for priority and secured debts. The debtor makes the payments to the trustee on a biweekly or monthly basis, and the trustee distributes the money to the creditors in accordance with the plan terms.
The amount stipulated in the repayment plan is based on the debtor's disposable income, which is the amount of money that the person has after paying for living expenses. After taking priority and secured debts into account, the best interest of the creditors is considered for unsecured debts. This involves calculating how much the creditors would have received if the individual filed forChapter 7 bankruptcy instead.
Individuals filing bankruptcy under Chapter 13 can only make a plan that repays creditors over three to five years. The plan is likely to be for three years if the debtor's monthly income is less than the state median. It's more likely to be for five years if the monthly income is more. There are no exceptions for longer payment periods, but creditors are prohibited from starting or continuing collection efforts for the duration of the plan.
When a debtor doesn't make the approved plan payments, the court could dismiss or convert the case into liquidation under Chapter 7 bankruptcy. The court might also dismiss or convert the case if the debtor doesn't pay domestic support obligations or doesn't file tax returns during the life of the plan.
After the completion of the repayment plan, the filer is entitled to a discharge of all debts included in the plan that remain unpaid. However, the debtor must certify that all domestic support obligations have been met and must complete an approved financial management course. The creditors in the plan are precluded from initiating legal or collection actions against the individual in regard to the discharged debts.
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