Chapter 13 Bankruptcy Overview
- Chapter 13 bankruptcy involves consolidating your debts into a monthly payment that you make for three to five years.
- There is a maximum amount of debt to be eligible for Chapter 13 bankruptcy.
- Creditors can't take collection actions against the debtor during bankruptcy.
Chapter 13 bankruptcy allows you to discharge some debts while repaying others with disposable income. It is helpful if you are going through a financial crisis. This is because Chapter 13 prevents property foreclosures or repossessions while repaying creditors over time.
This article provides an overview of how Chapter 13 bankruptcy can give you a fresh start from debt collectors. If you have questions about whether a Chapter 13 plan is right for you, consult a bankruptcy lawyer for legal advice.
Only individuals, not businesses, are eligible for relief under Chapter 13 bankruptcy. Filers can have no more than the maximum amount of combined secured and unsecured debts. As of June 21, 2022, the maximum allowable debt for Chapter 13 is $2.75 million (up to $465,275 in unsecured debts and $1,395,875 in secured debts). These amounts are subject to periodic adjustments to reflect fluctuations in the Consumer Price Index.
You cannot file for Chapter 13 relief if your prior bankruptcy petition was dismissed in the previous 180 days because you failed to appear in court or the petition was dismissed.
Additionally, if you wish to file for bankruptcy under any chapter (Chapter 7 and Chapter 13), you must complete credit counseling with an approved agency within the preceding 180 days. There are exceptions for emergency circumstances or when there aren’t enough approved agencies in your area.
After receiving credit counseling, you must file all court-required documents and details of your financial standing, including:
- All assets
- Court and filing fee receipts
- Debt agreements
- Average income
- Living expenses
- Copies of tax returns
You must also submit a certificate of completion for credit counseling and any debt repayment plan you developed during this counseling.
The court will appoint a trustee to oversee the process. The trustee will hold a meeting of creditors where you, the debtor, answer questions from the creditors and trustee under oath. Married couples who file jointly must both attend the meeting. Also, during the meeting, you will resolve any issues with the repayment plan to ensure that everything is correct before presenting it to a judge during a hearing.
You can develop a repayment plan with the credit counselor and bankruptcy trustee. Types of debts include priority debts. This includes most taxes and bankruptcy fees, as well as child support and spousal support if you owe it. Secured debts are those where the creditors have an ownership interest, like a mortgage for your house. Unsecured debts are those for which the creditors don’t have a lien against property, like credit card bills.
Your plan doesn’t have to pay unsecured debts in full but must include payments for priority and secured debts. You’ll make the payments to the trustee biweekly or monthly, and the trustee distributes the money to the creditors.
The amount in the repayment plan is based on your disposable income. This is based on your regular income minus any reasonable living expenses. After taking priority and secured debts into account, the bankruptcy trustee considers the best interests of the unsecured creditors. This involves calculating how much the creditors would have received if you filed for Chapter 7 bankruptcy instead.
When filing bankruptcy under Chapter 13, you can only make a plan that repays creditors over three to five years. The plan will likely be for three years if your monthly income is less than the state median. It’s more likely to be for five years if your monthly income is more.
There are no exceptions for longer payment periods. However, creditors are prohibited from starting or continuing collection efforts during the entire length of your plan. This includes foreclosure or repossession for a car loan.
If you don’t make the approved monthly payments, the bankruptcy court could dismiss the bankruptcy case or convert the case into liquidation under Chapter 7 bankruptcy. The court might also dismiss or convert the case if you don’t pay domestic support obligations or don’t file tax returns during the life of the plan.
After completing the repayment plan and taking a debtor education course, you are entitled to a discharge of all remaining debt, including credit card debt, medical bills, and other liabilities from unsecured creditors. The creditors in the plan can no longer take collection actions against you for the discharged debts.
You are still liable for certain debts that are not dischargeable, including child support, alimony, tax debts, and student loan debts.
There are strict rules and restrictions for filing Chapter 13 reorganization bankruptcy. A bankruptcy lawyer can look at your financial situation and help you decide which type of bankruptcy is right for you. Bankruptcy laws can be complicated, and the bankruptcy code is changing all the time. To get the most out of bankruptcy debt relief, talk to an experienced bankruptcy attorney.
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