Once debt begins to encroach upon your mortgage payment, car loan, utility, and daily costs, a heavier workload may not clear your debt. Some Americans can reorganise debts under the bankruptcy process where they are not necessarily losing any of their valuable assets right away.
The main intent behind Chapter 13 bankruptcy is for people who have a regular income but require time to reorganize their financial situation. It is not a process of speedily selling off property that is eligible for bankruptcy and most often requires payments over a court-approved period, typically three to five years, for the considered payments.
That distinction can be significant to those who are homeowners facing foreclosure, borrowers who are behind with a secured loan, or individuals who have extra income to repay at least a portion of their debt. However, once a decision is made, filing means a long financial commitment, so it’s important to understand the filing process.
What Is Chapter 13 Bankruptcy and How Does It Work
Chapter 13 is known as a wage earner’s plan and gives an eligible person with regular income the option to propose paying creditors an amount over a period of time. As opposed to negotiating with each creditor individually who may be listed in the plan, the debtor would normally pay off a trustee set by the court regularly, and that trustee would pass on the funds according to the confirmed plan.
The average payback is three or five years. One of the factors that can be used to determine a commitment period is income factors. Plans may not be over five years in duration.
One of the most common motivations for filing bankruptcy is to keep one’s vehicles and other assets while working out delinquent debts.
Key features include:
- Structured repayment plan: Eligible debts are arranged in a court-approved plan for repayment.
- Many collection efforts are stopped or delayed: Filing usually puts a stay in effect that automatically halts or delays many lawsuits, garnishments, collection activities, repossessions, and foreclosure proceedings.
- Curing a past-due mortgage payment(s): The borrower may be able to repay the past-due mortgage payment(s) during the repayment plan and continue to pay the new mortgage.
- Special stay for Chapter 13: If you have co-debtors on a certain type of consumer debt, you may be able to use the special stay of a Chapter 13 case.
- Discharge: If the plan is completed and other requirements are met, then qualifying remaining debts may be discharged.
The automatic stay is all-powerful, yet it has its limits. For instance, the state’s laws do not permit someone to file after the sale of a foreclosure sale to undo a sale that has already been made. In some cases, creditors might request court authorization to do so as well.
Who Qualifies for Chapter 13 Bankruptcy
Chapter 13 is designed for individuals, which includes qualifying self-employed individuals and individuals who have an unincorporated business. It is not a business reorganization proceeding that may be simply used by a corporation or partnership.
The regular income is important, as that will be a way for the court to determine whether the suggested payments are feasible. Any plan that appears to be well formed but for which the household cash flow cannot be identified is probably not going to sustain the solution.
Currently, the guidance of the U.S. Courts states that $526,700 in unsecured debt and $1,580,125 in secured debt are below the eligibility limits. These statutory allowances are subject to change from time to time, and so it is preferable to check the current bankruptcy rules of federal court, rather than relying on bankruptcy articles with old bankruptcy limits.
Some other key requirements may include:
- Having finished an approved credit counselling session within a set timeframe before applying for the appointment, with some exceptions.
- Providing full details of income, property, expenses, liabilities, creditors, and financial affairs.
- Adequate income to pay for the suggested repayments.
- Meets requirements of prior bankruptcy cases/dismissals.
- Keeping up with filing obligations and/or domestic support requirements as applicable during the case.
Pre-filing credit counseling and debtor education post-filing are unique requirements, according to the Department of Justice. Debtor education also has to be completed before getting a discharge (with limited exceptions).
Making the filing decision may not be the right financial decision for eligible filers. Factors to consider include income stability, property, type of debt you owe, arrears, monthly expenses, and realistic ability to keep the payments up for a couple of years.
Chapter 13 Bankruptcy Timeline: From Filing to Discharge
The process is much more involved than filling out forms and waiting for the court to “wipe away the debt. At the start of the case, there are a number of significant events.
1. Complete pre-bankruptcy credit counseling
In general, the person needs to be counseled by an approved agency prior to filing. The U.S. Trustee Program has lists of agencies that are approved.
2. File the bankruptcy petition
Filing the petition and submitting documents with the correct bankruptcy court establishes the case. The debtor gives extensive financial data: assets, debts, income, expenses, contracts, and other financial matters, etc.
3. Automatic stay generally takes effect
There’s usually an automatic stay that is implemented upon filing, so that many creditors can’t continue to pursue their efforts without court approval.
4. Submit the repayment plan
The plan must be filed with the petition, unless an extension is granted by the court, which is generally within 14 days after the petition is filed. It provides information on how various creditors’ claims will be addressed.
5. Begin plan payments
An important point borrowers ought to not fail to remember: payments generally need to begin within 30 days after they have actually filed, even if the court has not yet authorized a strategy.
6. Attend the meeting of creditors
There was usually a trustee creditors’ meeting between 21 and 50 days after the filing. Debtor’s information and testimony under oath on financial status and payment plan.
7. Attend the confirmation process
The bankruptcy judge determines if the plan meets legal criteria and is viable. If creditors actually object to confirmation. At times, the plan may be adjusted due to issues, and the case is not terminated right away.
8. Make payments for the plan period
Once confirmed, the plan goes as scheduled. Failure to make required payments might lead to case dismissal or conversion.
9. Complete debtor education and discharge requirements
Once certain requirements are met, including payments, those debts which remain can usually be liquidated. Generally, the plans are made to last for three to five years, so getting a discharge is a long-term commitment.
What Happens to Your Car Ca,r and Other Debts
All debts are not equal. The idea of secured, priority, and unsecured claims helps the repayment process to make sense.
Your home
Chapter 13 can provide a huge benefit to homeowners: time to cure mortgage arrears.
If you have a normal mortgage of $1800 per month and owe $18,000. Sometimes the arrears can be paid over time, and this could be through a repayment plan.
But once you file, that doesn’t mean that the mortgage payments disappear. As long as a homeowner is willing to make mortgage payments, these payments will start to come due after the filing, and the homeowner will need to work to alleviate the arrears with the plan.
Your car
Vehicle loans are secured debts, and they may be handled differently depending on a variety of conditions such as when the vehicle was loaned, as well as its worth and just about any loan arrangement.
Sometimes, a secured creditor holding “secured” debt other than a mortgage loan on the debtor’s primary dwelling may be able to reschedule the debt under the plan. If a car Note is due for payment, there are specific rules in place that dictate what amount can be paid on that debt, and presupposing bankruptcy means the payment on a vehicle Note drops to its market value is incorrect.
Priority debts
There are some obligations that are treated specially. Specific taxes and bankruptcy charges are examples of items that can be included in priority claims. These claims must be paid in full unless there is a specific exemption in the law, or another treatment allowed is implemented.
Unsecured debts
Unsecured debt is typically in the form of credit cards, many medical bills, and unsecured personal loans.
Being a confirmed plan doesn’t necessarily mean that all unsecured creditors will be paid 100 cents of the value of their debt. How much may vary based on the amount of income available, property, length of the plan, and other bankruptcy guidelines. Unsecured creditors usually are entitled to at least what they would receive if the debtor’s nonexempt assets were liquidated in Chapter 7.
Not all obligations will be eliminated due to a bankruptcy. Some debts, such as domestic support, many student loans, some taxes, and other legally protected debts may still be left unpaid.
Costs, Benefits, and Challenges to Consider
The filing fee for a Chapter 13 bankruptcy petition in federal court is $313 (as of today). If a debtor can’t pay the amount at once, he or she might be able to ask for installment payments, which would be at the court’s discretion. Legal fees and costs can also contribute significantly to the total cost and vary from case to case and amongst different jurisdictions.
The benefits that could be gained can be great:
- It is possible to retain valuable assets during the restructuring of debts.
- An automatic stay is a major weapon against filing that will end many actively collected debts.
- Arrears of a mortgage can be distributed over the repayment period.
- There are some secured debt items that might be restructured.
- A temporary measure of debt protection for qualifying co-signers of consumer debts.
- Successful completion may allow some of your remaining eligible debts to be discharged.
- There are responsibilities that come with those benefits.
Commitment to take consistency in the budgeting of the 3- to 5-year plan. Payments have to be made on a regular basis; mortgage or other mandatory obligations must remain current; and incurring new debts may be subject to consultation with and/or permission from the trustee and/or the court, per local procedure and circumstances.
Changes in income can be an issue, as well. The first plan may not be viable if you lose your job, experience a significant reduction in income, or have an unexpected expense. Sometimes, it may be necessary to change a plan, depending on the facts. In other situations, the case can be dismissed or converted.
Chapter 13 and Chapter 7 also resolve financial issues in various ways. Chapter 7 is generally for liquidation and has a quicker path to discharge, while Chapter 13 utilizes multi-year repayment plans and income from the future. Chapter 13 may therefore be more applicable if you have a priority goal of saving your property and/or getting back on top of secured debt.
Before filing, it can be helpful to consider the following questions:
- Do I have consistent income to make the payments over a period of years?
- Do I plan on preventing a home foreclosure?
- What is my unsecured debt behind?
- Which debts may in reality be eliminated?
- What other property could be impacted under Chapter 7?
- Will I be able to afford the proposed budget in my household?
Personal legal counsel from a competent bankruptcy attorney may be helpful prior to filing, as exemptions, local rules, property, and individual factors may alter the result.
Frequently Asked Questions
How long does Chapter 13 bankruptcy last?
Repayment plans normally vary from three to five years. The period depends on the needs and income, and must not last more than 5 years.
Can Chapter 13 stop foreclosure?
An automatic stay and the ability to cure mortgage arrears can generally halt an in-progress foreclosure by filing. A normal court filer cannot reverse a foreclosure sale that has already occurred pursuant to the applicable state law.
Do I have to repay all my debt?
Not necessarily. There are some debts that must be dealt with in a specific manner, and unsecured debts, if they qualify, can be partially paid. After a successful plan completion, there may be the possibility of qualifying unpaid balances being discharged.
Can I keep my car?
Potentially, yes. Chapter 13 will often permit debtors to keep their cars as secured debts are approved in the plan. Treatment may vary based on the loan, the value of the collateral, and the type and timing of bankruptcy, and the applicable bankruptcy rules.
What happens if I cannot make my plan payments?
Failing to make the required payments will result in case dismissal or case conversion. If the funds have changed due to a specific reason, sometimes it is possible to change the repayment plan. It is important to contact a bankruptcy attorney as soon as possible and not just stop payments.
Conclusion
Chapter 13 bankruptcy is for individuals who have a consistent income but seriously outrun their means in the arrangement of debt. Its strongest benefit is also its weakest: it does not provide an immediate way out, but instead imposes a court-supervised financial plan to adhere to for years.
Grasping your realistic findings, what debts you will keep, and how the treatment of your home and other assets will affect you can give you a more productive conversation with a bankruptcy expert and help you determine if such a debt relief process is the right option for you.
For more information, also read our related article here.