What is Chapter 13 bankruptcy? Arizona bankruptcy lawyers of Ariano & Associates.

Chapter 13 bankruptcy is known as the “wage earner’s” bankruptcy because it enables individuals with regular income to repay all or part of their debt within a three to five year repayment plan. Duration depends on your monthly income and how much time you need to make your plan payments.1 For example, if your income is less than the median for your applicable household size, you may normally participate in a three year repayment plan. Alternatively, if your income is above median you will also have to complete a five year repayment plan. Five years is the maximum length of any Chapter 13 repayment plan.2

Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy allows you to keep your property. Chapter 7 bankruptcy liquidates your nonexempt assets, such as credit card debt.

Advantages of a Chapter 13 Bankruptcy

A Chapter 13 provides you with an opportunity to save your home or personal property by stopping foreclosure proceedings and allowing you to cure your mortgage delinquency. In other words, a Chapter 13 allows you to keep property that might be sold in Chapter 7. You may also be able to remove a second mortgage or lien (lien stripping) or re-write a secured loan such as a car loan (cram down). A Chapter 13 acts as a debt consolidation. Specifically, one payment is made to a trustee who then distributes payments to creditors. Finally, individuals only contact creditors through the bankruptcy trustee and thus have no direct contact while under Chapter 13 protection.3

Requirements for Qualification

In order to qualify for a Chapter 13 bankruptcy you must  be able to demonstrate to the court that you can afford to pay some or all of your debt through a repayment plan. Specifically, if your income is irregular or too low or you are a stockbroker or commodity broker you may not qualify. 11 U.S.C. 109(e).

There are also limitations concerning your financial burden. You are precluded from filing if your individual total unsecured debt is more than $383,175 or secured debt is more than $1,149,525.  11 U.S.C. § 109(e).

Further, if you were a debtor in a bankruptcy case that was dismissed within the preceding six months you are ineligible to be a debtor under any chapter. 11 U.S.C. 109(g)(1). In certain cases, if you received a discharge in a previous Chapter 7 case you may file a later Chapter 13 case to propose a repayment plan to take care of liens on property you want to keep possession of.4

 

Requirements for Filing

Creditor Counseling: Six months prior to filing a Chapter 13 bankruptcy you have to complete a counseling class with an approved Credit Counseling Agency. This class can be taken in-person, but is usually completed online or over the phone.

Forms and Fees: Chapter 13 bankruptcy is initiated by the filing of a voluntary petition. The current cost to file a Chapter 13 is $281. Additional required paperwork that must be filed with the court are called schedules, statements, and a Chapter 13 plan. The schedules and statements contain information regarding your assets and liabilities, income and expenses, executory contracts, and unexpired leases and statements of your financial affairs. Therefore, in order to complete the forms it is best to compile information about all your creditors at the time and the nature of their claims, the source of your income, and enough to make a list of your property and expenses.5

The Chapter 13 plan designates which creditors are paid and the amount they will receive. The Chapter 13 plan must be filed within 14 days after the petition is filed, unless you are awarded an extension from the court. Fed. R. Bankr. P. 3015.6

Payments for the Chapter 13 Plan

The Chapter 13 plan payment is specific to each individual case. The plan will specify which property you retain and how you will treat creditor claims over the term of the plan, which must be within five years.7 Your first Chapter 13 plan payment is generally due 30 days after your case is filed. This usually means you must begin sending monthly payments to a trustee according to the plan you proposed.8

Some people only pay a fraction of their debt through the Chapter 13 bankruptcy while others pay most or all of their debt. There are generally three types of claims; (1) priority, (2) secured, and (3) unsecured.9  Priority debts are granted special status by bankruptcy law and can include child support, alimony, or certain tax debt that must be paid in full through your Chapter 13 plan.10 Secured debts allow a creditor  like a mortgage company or a car lender to put a claim on certain property if you do not pay the underlying past due payments through the Chapter 13 plan.11 Lastly, unsecured debt usually does not involve a creditor with any special rights to collect on the property you own.12 Some examples of unsecured debt include credit cards, medical bills, personal loans, certain tax debts, payday loans, balances from repossession or foreclosure, or more.

Chapter 13 bankruptcy may reduce the amount of unsecured debt you owe, as opposed to priority and secured debt.  The amount paid to your unsecured creditors through your repayment plan depends on your disposable income and your nonexempt assets.

What Happens When You File

Automatic Stay: Upon filing a Chapter 13 bankruptcy, an automatic stay immediately takes place to protect you from creditors who want to collect the debt. They automatic stay also stops foreclosure proceedings against your home.13 Chapter 13 bankruptcy also provides an automatic stay against co-debtors, so a creditor cannot seek consumer debts from an individual who is liable along with you as a debtor. 11 U.S.C. § 1301(a).14 However, in certain situations a creditor may “lift” the automatic stay. You should consult an experienced Tucson bankruptcy attorney to find out if the bankruptcy stay will remain in effect throughout your Chapter 13 plan.

Formalities After Filing

Meeting of Creditors: The Meeting of Creditors is a required hearing before the bankruptcy court where the bankruptcy trustee asks you a series of questions under oath concerning the bankruptcy papers you filed with the court. While creditors can show up at the meeting and ask you questions, they rarely show up. As with most Chapter 13 bankruptcies, the Meeting of Creditors is the only appearance you will have to make. It is also important to note that in order for your creditors to get paid through your Chapter 13 plan they must file a “proof of claim” document either 90 days before your Meeting of Creditors or 180 days from the filing of bankruptcy depending on the nature of the creditor.15

Bankruptcy Trustee: The bankruptcy trustee is a fiduciary who oversees your Chapter 13 bankruptcy. After you file all your bankruptcy forms you must also provide the trustee with documents such as pay stubs.16 Since a Chapter 13 bankruptcy can span three to five years, the trustee has the role of receiving your payments, distributing the payment to creditors until the plan is paid off, and keeping an accounting of such.17 The trustee also must review and object to improperly filed creditor “proof of claims” documents.18

Length of Time: Completion of a Chapter 13 bankruptcy can take three to five years.

Discharge: Upon successful completion of a Chapter 13 bankruptcy, all remaining debts that are eligible for discharge are eliminated. In order to receive a discharge you must complete a Debtor Education class from an agency approved by a U.S. trustee and you must be current with child support or alimony.

[1] Bret A. Maidman, How Long Will My Chapter 13 Plan Last?, Nolo.com, http://www.nolo.com/legal-encyclopedia/how-long-will-my-chapter-13-plan-last.html (last visited Feb. 1, 2014).

2 Id.

3 Individual Debt Adjustment, USCourts.Gov, http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter13.aspx (last visited Feb. 1, 2014).

4 Chapter 13 Practice & Procedure § 3:1

5 Individual Debt Adjustment, supra note 3.

6 Id.

7 Chapter 13 Practice & Procedure § 9A:1.

8 Baran Bulkat, The Role of the Bankruptcy Trustee in Chapter 13, Nolo.com, http://www.nolo.com/legal-encyclopedia/bankruptcy-trustee-chapter-13.html (last visited Feb. 1, 2014).

9 Individual Debt Adjustment, supra note 3.

10  See id.

11 See id.

12 Id.

13 Id.

14 Id.

15 Bulkat, supra note 8.

16 Id.

17 Id.

18 Id.