We talk about bankruptcy as if it’s only one process, but there are many different types of bankruptcy. One of the most common and advantageous types of bankruptcy is Chapter 13. But how exactly does Chapter 13 bankruptcy work? And when is it appropriate to declare this type of bankruptcy?
The First Steps
If you’re thinking about filing for Chapter 13 bankruptcy, or any type of bankruptcy, one of your first steps should be talking to a Chapter 13 bankruptcy attorney.
Your attorney will serve many roles as you learn more about bankruptcy and make the decision as to whether to file. They’ll act as an educator, helping you better understand what bankruptcy truly means and what the process will be like. They’ll act as an advisor, providing you with insight and direction, and helping you make the best decisions for your financial future. They will also act as a communicator and ambassador, helping you navigate the complexities of the legal world.
Most lawyers offer free initial consultations, so you have nothing to lose by talking to a professional and seeing what they can do for you. They may even advise you not to file for bankruptcy.
To apply for Chapter 13 bankruptcy protection, there are certain conditions you must meet. You and/or your spouse must have a steady income that is sufficient to make monthly trustee payments. You should be current with all of your tax filings. Additionally, the debtor’s (person filing) total unsecured debt may not exceed $419,275, and/or secured debt totaling in excess of $1,257,850.
The Basics of Chapter 13 Bankruptcy
Chapter 13 is a chapter of the federal bankruptcy code meant for individuals and/or individuals with businesses that are not an established limited liability company, corporation, or partnership. Filing for Chapter 13 bankruptcy provides you with the opportunity to reorganize your debts, which typically allows a person to discharge and eliminate a substantial amount of debt, as well.
There may be numerous reasons to file for chapter 13 protection. However, typically, a chapter 13 case is filed for three reasons. The first reason is to save a house from a foreclosure action due to mortgage payment arrears. The second reason is to save a vehicle from repossession, due to payment arrears. The third reason is to eliminate most unsecured debt, such as credit card debt and personal loans.
A chapter 13 requires a debtor to file a plan that requires a monthly payment to a trustee for 36 to 60 consecutive months. The amount of the monthly payment is based on numerous factors that include the following: the debtor’s household’s income and expenses; the type of debt owed; and the debtor’s intentions. The number of months for a plan may be based on various factors such as the value of the debtor’s assets, the debtor’s household’s income, and the debtor’s intentions.
The debtor must comply with the bankruptcy code and pay each debt based on the bankruptcy code, no matter the reason for the filing. Therefore, a person filing for bankruptcy to save their car may be required to pay other creditors, if the bankruptcy laws required such payments.
Priority debt arrears, such as child support and alimony, must always be paid through a bankruptcy plan. Secured debt arrears, such as a mortgage, must be paid if the debtor wants to keep his house. The amount that is paid toward unsecured debt, such as credit card debt, is based on the bankruptcy code criteria. Therefore, a person filing to keep a car from repossession may be required to pay priority debt, secured debt, and unsecured debt.
Each month, the debtor makes a payment to a trustee that is disbursed to the creditors in the order that is required by the bankruptcy code. When the last trustee or plan payment is made, the trustee’s office will administer the case for discharge. At that time, all required payments must have been made to receive a discharge order. The discharge order means that any pre-bankruptcy unsecured debt is eliminated, if not paid through the plan.
If the bankruptcy filing includes the payment of pre-filing mortgage arrears, at the end of the case, all such arrears should be paid, in addition to all regular monthly mortgage payments that were due throughout the plan. Also, at the end of the plan, all pre-filing priority debt should be paid through the plan.
An understanding of a chapter 13 should include the comparison of a chapter 7
A chapter 7 allows a person to eliminate certain types of debt within 4 months of the filing. Also, no payments are required in a chapter 7. A Chapter 11, like a Chapter 13, is created to reorganize debt. A Chapter 11 case was created for an individual with substantial debt; corporations; limited liability companies; and small businesses with substantial debt.
Typically, a chapter 7 allows a person to eliminate all unsecured debt, which is any debt that is not connected to collateral, such as a house or car. The debtor will be able to eliminate secured debt if the collateral is surrendered to the creditor. If a person wants to keep their house, they must be current with their mortgage payments. The same applies to automobile financing.
The main chapter 7 criteria require the debtor’s household’s income to be less than the reasonable and necessary expenses that are needed to live. Also, if a debtor owns property with substantial equity, the trustee may be able to sell the property, such as a house.
If the debtor’s monthly household income is in excess of the household’s reasonable and necessary expenses, the debtor may be able to file a chapter 13 and pay back a portion of the unsecured debt. In this scenario, the debtor is required to pay at least the amount of her disposable income to the trustee for 36 to 60 months. A chapter 7 does not allow a person to save their car or house due to payment arrears.
Of course, filing for bankruptcy is a complex financial decision, and a highly personal one, so it’s unwise to make this decision impulsively. Hire a lawyer you trust and take their advice seriously if you want to see the best results.