Chapter 13 Bankruptcy Basics[yoast-breadcrumb]
Chapter 13 Bankruptcy Basics
Chapter 13 bankruptcy can be a great option for folks who need some help getting their finances back on track. It lets you keep your property while repaying some of your debts over 3-5 years. I’ll walk you through the basics so you can decide if it’s right for you.
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is a type of bankruptcy that lets you repay your debts over 3-5 years while keeping your property. It’s sometimes called a “wage earner’s plan” because you need regular income to qualify.
Here’s how it works:
- You make monthly payments to a bankruptcy trustee, who distributes the money to your creditors according to your repayment plan. This consolidates your debts into one payment.
- Most or all of your unsecured debts like credit cards, medical bills, personal loans etc. can be discharged at the end of your repayment plan. That means you don’t have to pay them anymore!
- You get to keep property like your home, car, and other assets. You just have to keep making payments on any secured debt like your mortgage or auto loan.
- Collection calls and lawsuits stop immediately when you file, giving you time to get back on your feet.
- Your repayment plan typically lasts 3-5 years. At the end, any remaining unsecured debt is discharged.
So Chapter 13 gives you time to catch up on payments and pay back a portion of what you owe over several years. This can help you avoid foreclosure, repossession, utility shut-offs, wage garnishment etc. It’s not a quick fix, but it can give you breathing room.
Who Qualifies for Chapter 13?
To qualify for Chapter 13 bankruptcy, you need:
- Regular income – This can come from a job, pension, social security, child support, etc. You just have to show you have enough income to make your plan payments.
- Eligible debt limits – Your secured debts (like mortgages and auto loans) cannot exceed $1,257,850. Your unsecured debts (like credit cards) cannot exceed $419,275.
- You must have filed tax returns – If you owe any back taxes, you’ll have to file all returns and be current before getting Chapter 13 relief.
So Chapter 13 is a good option if you have regular income but your debts are too high for a Chapter 7 bankruptcy. It lets you keep assets you’d otherwise have to liquidate.
How Do I File for Chapter 13 Bankruptcy?
Filing for Chapter 13 bankruptcy involves several steps:
1. Meet with a Bankruptcy Attorney
Sit down with a qualified bankruptcy lawyer to discuss your specific situation. They can advise if Chapter 13 is your best option and how to proceed.
2. Complete the Paperwork
You’ll need to provide details on your income, expenses, assets, debts, creditors, etc. Your attorney will use this to prepare your Chapter 13 forms.
3. File Your Petition
This officially opens your Chapter 13 case. Filing the petition triggers the automatic stay, stopping collections immediately.
4. Attend the 341 Meeting
Also called the “creditors meeting,” you’ll meet with the trustee and any creditors to review your finances under oath.
5. Submit Your Repayment Plan
Your attorney will create a proposed repayment plan based on your income and debts. The trustee and court must approve it.
6. Make Your Chapter 13 Plan Payments
Once approved, you’ll start making your monthly payments to the trustee, who distributes them to creditors.
7. Receive Your Discharge
After completing all payments over 3-5 years, you’ll get a discharge order eliminating most remaining unsecured debts.
As you can see, Chapter 13 involves time and effort. An experienced bankruptcy lawyer can make the process much smoother.
How Much Does Chapter 13 Bankruptcy Cost?
The main costs involved with Chapter 13 are:
- Attorney’s fees – On average, attorney fees range from $3,000-$5,000. They may allow you to pay over time.
- Filing fee – This is around $310 to file your petition with the court. It may be paid in installments.
- Trustee fees – The trustee that handles your case gets a percentage of each payment, usually around 10%.
- Credit counseling – You’ll need pre-filing credit counseling and a post-filing financial course costing around $50 each.
- Other costs – You may have court fees, document fees, etc. Expect $1,000 or so in additional costs.
While not cheap, an effective Chapter 13 case can save you tens of thousands in the long run. An attorney consultation is the best way to estimate your total costs.
The Chapter 13 Repayment Plan
The core of a Chapter 13 case is the repayment plan. This lays out how much you’ll pay each month and how payments are distributed to creditors.
Here are some key things about Chapter 13 plans:
- Your payments are based on your disposable income and debt amounts. Payments usually range from $300-$600 per month.
- Payments go to a trustee first, who takes their fee then distributes the rest to creditors according to your plan.
- Your plan can last from 36-60 months. Longer plans may pay more to creditors.
- You must stay current on secured debts like your mortgage or car loan during the plan.
- Priority debts like taxes, support, and domestic support must be paid in full.
- Your attorney will classify debts and propose repayment percentages for each class.
- Unsecured debts like credit cards often get paid pennies on the dollar.
- At the end, any remaining unsecured debt is discharged.
Your attorney will optimize your plan to pay off the maximum debts possible over 3-5 years. Getting the court’s approval is key.
Pros and Cons of Chapter 13 Bankruptcy
Like any major financial move, Chapter 13 bankruptcy has both advantages and drawbacks. Let’s look at the key pros and cons:
- Pause collections and stop foreclosure, repossession, garnishment etc.
- Consolidate debts into a single monthly payment
- Get caught up on mortgage and car loans
- Keep all property like your home, car, retirement funds etc.
- Discharge most unsecured debts after repayment plan
- Pay off debts at reduced interest rates
- Rebuild credit during and after bankruptcy
- Monthly trustee payments for 3-5 years
- Owe priority debts like taxes and support in full
- Lose property if you don’t keep up secured payments
- Bankruptcy on your credit report for 7-10 years
- Possible trustee or court objections to your plan
- If dismissed, creditors can resume collections on all debts
- Can’t file again for 2-4 years if case is dismissed
As you can see, it’s not an easy way out but can be very helpful if you stick with the process. Talk to a bankruptcy attorney to get advice specific to your situation.
What Debts Can Chapter 13 Discharge?
One big benefit of Chapter 13 is the ability to discharge many types of debts after completing your repayment plan. Common dischargeable debts include:
- Credit card debt – Probably the most common debt addressed, credit card balances can be paid off for pennies on the dollar.
- Medical debt – Outrageous hospital bills and other medical debts can often be discharged.
- Personal loans – Unsecured personal loans from banks, payday lenders, family etc can be discharged.
- Past-due utility bills – Get caught up on water, power, phone bills then discharge the remaining amounts.
- Deficiency balances – If your car or home was repossessed, any remaining loan balance can be discharged.
- Civil judgments – If you lost a lawsuit, the judgment can probably be discharged in Chapter 13.
- Most other unsecured debts – Debt like gym memberships, overdrawn bank accounts etc can also be discharged.
Some debts that CAN’T be discharged in Chapter 13 include student loans, child support, alimony, and most tax debts. Overall though, Chapter 13 can eliminate thousands in burdensome unsecured debts so you get a fresh start.
How Does Chapter 13 Affect Your Credit?
Filing Chapter 13 bankruptcy will impact your credit, but not always as badly as you may think. Here’s an overview of how it affects your credit reports and scores:
- A Chapter 13 bankruptcy stays on your credit report for 7-10 years from when you originally filed.
- Your credit scores will initially drop after filing, but start to gradually recover. Scores can improve even before you finish your case.
- Making all your Chapter 13 plan payments on time helps your credit scores rebound quicker.
- You can usually qualify for new credit about 1-2 years into your plan if you’ve made timely payments.
- Each account included in your bankruptcy will show a $0 balance but will still show as “included in bankruptcy.”
- Your on-time payment history remains, so your positive history isn’t erased.
- After bankruptcy, focus on responsible credit use, keeping balances low and making payments on time.
So Chapter 13 bankruptcy will sting your credit initially but responsible habits during and after your case can lead to recovery. And improved credit is certainly better than continuing financial struggles.
Can Creditors Take Your Property in Chapter 13?
One big benefit of Chapter 13 is being able to keep all of your property, unlike Chapter 7 liquidation. However, creditors can still take your property in Chapter 13 if you don’t keep up payments.
For secured property like your home or vehicle:
- You must keep making your regular payments directly to the creditor.
- If you fall behind, the creditor can get permission from the court to begin foreclosure or repossession proceedings.
- Your attorney may be able to negotiate with the lender to cure any arrears, but continued missed payments put your property at risk.
- Make paying mortgage, auto loans, and other secured debts a top priority.
For personal property assets:
- Creditors lose their right to repossess or pursue property like your furniture, electronics, etc. once your Chapter 13 case is filed.
- However, the court can dismiss your case if you miss plan payments, allowing creditors to resume collections on all debts.
- This includes repossessing personal items, so make your trustee plan payments on time.
The bottom line is that you must keep up payments inside and outside your Chapter 13 plan to protect your assets. If you fall behind, creditors can get permission to repossess secured property like your home or car. They can also ask the court to dismiss your case so they can resume collections on everything you owe.
Some tips to avoid repossession and dismissal:
- Make sure your repayment plan is feasible based on your current income and expenses. Don’t commit to more than you can realistically pay each month.
- Build some wiggle room into your budget in case of financial surprises. Having a cushion makes it easier to stay current on payments.
- If your income decreases, ask your attorney to file a plan modification with the court right away. This can lower your payments to a manageable level.
- Communicate with your attorney about any payment difficulties as soon as they arise. They can request temporary payment suspensions in some cases.
- Prioritize payments on secured debts like your mortgage and auto loans. Work with your attorney if you need help getting caught up.
- If your personal situation changes, like a job loss, your attorney can sometimes delay or prevent repossession until you get back on your feet.
While challenging at times, successfully completing your Chapter 13 repayment plan allows you to catch up on payments and discharge thousands in burdensome unsecured debts. With diligence and your attorney’s help, you can get through it without losing the assets you need to move forward.