Chapter 13 Bankruptcy
Unlike a Chapter 7 Bankruptcy, in which many debts are completely eliminated, in a Chapter 13 Bankruptcy, debts are paid back partially or in full over a period of three to five years. Chapter 13 is used when Chapter 7 is not available. Chapter 7 may not be available due to any of the following circumstances:
- You earn too much money to qualify for Chapter 7
- You have non-exempt assets or assets with equity that exceeds the allowed equity in an exempt asset
- You have fallen behind in your home or car payments and wish to catch up rather than lose your home or car
- You received a discharge in a Chapter 7 Bankruptcy more than 4 years ago but less than 8 years ago
- You have a first mortgage that exceeds the fair market value of your home; and in addition have a second mortgage which you wish to turn into an unsecured debt
Chapter 13 can temporarily stop a foreclosure action through the automatic stay of legal actions against you when you file. If your repayment plan is not approved by the court or if you don't keep to your repayment plan, the lender will be able to proceed with the foreclosure. If your Chapter 13 procedure is dismissed, and you file a second one, the automatic stay will not apply to the foreclosure action.
The amount that you are required to pay in a Chapter 13 Bankruptcy will be determined by the amount of your income and the amount and type of your debts. The arrears on secured debts, such as mortgages or car loans, must be paid in full in the repayment plan. You may be required to repay from 10% to 100% of the amount of your unsecured debt. An attractive feature of Chapter 13 is that, although an extra 10% is added by the court to your debt that is being repaid, you will pay no interest on the debt. This can result in substantial savings, especially in the case of credit card debt, which typically bears interest at an annual rate of 20 to 30 percent or more.
To qualify for Chapter 13 Bankruptcy, you must have regular income that is sufficient to pay both your living expenses and the payments under the Chapter 13 repayment plan.
As in the case of a Chapter 7 Bankruptcy, you are required to take two educational classes. You must take the first class, Credit Counseling, with a court approved company prior to the filing of the bankruptcy petition. You must file the bankruptcy within 180 days from your completion of the class. You must take the second class, Personal Financial Management, after the filing of the bankruptcy petition and before the conclusion of the Chapter 13 Bankruptcy.
There are limits on how much debt you can owe in a Chapter 13 Bankruptcy. Unsecured debts, such as credit cards and medical bills, cannot total more than $360,475, and secured debts, such as mortgages and car loans, cannot total more than $1,081,400. These amounts are periodically adjusted to reflect changes in the consumer price index. Only individuals or self-employed individuals with an unincorporated business may file for Chapter 13 Bankruptcy. Corporations may not use Chapter 13. Those who do not qualify for Chapter 13 may qualify for Bankruptcy under Chapter 11.
As in the case of a Chapter 7 Bankruptcy, in a Chapter 13 Bankruptcy, there is a hearing, which is known as the first meeting of creditors. Again, although your creditors are invited to the hearing, it is very unusual for any of them to appear. At the hearing, you are asked questions by the trustee, who is appointed by the court and is responsible for ensuring that fraud has not been committed. The trustee will also ask for any additional information or documents that the trustee thinks are necessary to determine whether your proposed repayment plan is satisfactory. After all of the trustee's questions have been asked and answered satisfactorily, the trustee will close the meeting. If the trustee has further questions, the trustee will schedule a second meeting.
In addition to the first meeting of creditors, a Chapter 13 Bankruptcy involves an additional hearing, which is called the confirmation hearing. The bankruptcy judge presides at this hearing and will confirm or approve the repayment plan. Some judges do not require a confirmation hearing.
If the plan is approved, you will make regular monthly payments on pre-petition debts to the trustee, who will pay the creditors. You will pay post-petition debts, including current mortgage payments, directly to the creditors.
Once payments are completed, if you paid back 100% of your debts, your debts will, of course, be paid in full. If your approved repayment plan provided for payment of less than 100% of your unsecured debts, upon the completion of the payment plan, the remaining balance of the unpaid debts will be discharged, which means that you will not be responsible for them.