What is Chapter 13 Bankruptcy?
Once debtors have exhausted Alternatives to Bankruptcy and have decided that Filing for Bankruptcy is their best option, they must decide between Chapter 7 and Chapter 13 Bankruptcy. Chapter 13 Bankruptcy is used for the “reorganization” of debt portfolios. Unlike Chapter 7 Bankruptcy, Chapter 13 Bankruptcy allows consumers to retain more valuable non-exempt property.
Can you repay your debts in 3 to 5 Years?
Chapter 13 Bankruptcy is a more complicated process that requires the debtor to develop a three to five year payment plan for repaying creditors (lenders). Many debtors choose Chapter 13 Bankruptcy to protect valuable property that might not be exempt (i.e. antiques, family heirlooms, or real estate). Debtors must have a regular, reliable income, which will enable them to continue to make regular payments. Once the Chapter 13 Bankruptcy is successfully completed, some eligible debts will be discharged.
Chapter 13 Requirements
These are the basic requirements that must be met to file for Chapter 13:
- Steady income
- Reasonable level of disposable income
- Debt limits can not exceed a certain amount
- Only for individuals
If all of these requirements are met, then debtors may opt for Chapter 13 Bankruptcy to adjust their debt load.
When is Chapter 13 advisable?
Chapter 13 is the best option when the following goals are desired:
- Catch up on mortgage
- Hold onto valuable, non-exempt property
- Repay small percentage of troublesome debts
- “Automatic stay” prohibits creditor harrassment
What must I include in my Repayment Plan?
The Repayment (Reorganization) Plan provides the details of what debts you have and how you will repay them over three to five years. The Standing Trustee must approve the reorganization plan, which includes the following:
- Debts owed
- Eligible debts to discharge
- Priority order for bill repayment
- Monthly amount
- Trustee fees
An “automatic stay” (preventing other lawsuits or repossession actions) remains in effect for the duration of the reorganization plan.
Basic Chapter 13 Process
Debtors must pass a credit counseling course before filing and a financial management course upon completion of the payment plan.
The following lists the basic Chapter 13 process:
- Petition filed and court fee paid
- Court sends notices to creditors and debtor
- Debtor submits copies of recent federal income tax returns
- Repayment plan formulated
- “341 Meeting”
- Confirmation hearing
- Valuation hearing
- Complete payment schedule
- Discharge hearing eliminates remaining debt balances
At the “confirmation hearing” the court approves or rejects the payment plan. At the “valuation hearing” the secured creditors can challenge the value of the debtor’s collateral.
What is the Role of the Standing Trustee?
The “Standing Trustee” is assigned by the court to scrutinize all technical aspects of the repayment plan to
determine if it is financially feasible. The Standing Trustee earns more money if the plan is longer.
The “best-interest test” requires that unsecured creditors receive at least as much under Chapter 13 as they would have under Chapter 7 Bankruptcy.
The “best-efforts test” requires debtors to pay off as much debt as possible with their disposable income.
Advantages of Chapter 13
These are Chapter 13 advantages:
- Usually debtors can use and keep their non-exempt property
- Prevents repossession or foreclosure
- Wider variety of debts discharged
- “Superdischarge” of certain debts
Disadvantages of Chapter 13
These are Chapter 13 disadvantages:
- Strict budget control
- Three to five years
- No more debt can be acquired during repayment period.
Chapter 13 Bankruptcy can be converted into Chapter 7, if conditions aren’t met. Statistics show that only about one-third of filers complete their repayment plan under Chapter 13.
The debtor should immediately contact the Trustee if any unforeseen circumstances – like job losses or medical emergencies – arise. Then, the debtor may qualify for a “hardship discharge.”
Hold onto Valuable Property with Chapter 13 Bankruptcy
Chapter 13 requires better financial management, which may be a blessing in disguise, since all debtors must eventually acquire better habits to prevent future debt hardships. The benefits of retaining valuable non-exempt property are a good incentive for being financially responsible. Chapter 13 helps debtors pay off debt while holding onto valuable non-exempt property.