Chapter 13

Chapter 13

In a Chapter 13 bankruptcy, you don't have to hand over any property, but you must use your income to pay some or all of what you owe to your creditors over time -- from three to five years, depending on the size of your debts and income.

In a Chapter 13 bankruptcy, you don't have to hand over any property, but you must use your income to pay some or all of what you owe to your creditors over time -- from three to five years, depending on the size of your debts and income.

 

An Overview of
Chapter 13 Bankruptcy

The basic steps involved in a typical Chapter 13 bankruptcy case.

Chapter 13 bankruptcy, sometimes called reorganization bankruptcy, is quite different from Chapter 7 bankruptcy. In a Chapter 7 bankruptcy, most of your debts are wiped out; in exchange, you must relinquish any property that isn't exempt from seizure by your creditors. In a Chapter 13 bankruptcy, you don't have to hand over any property, but you must use your income to pay some or all of what you owe to your creditors over time -- from three to five years, depending on the size of your debts and income.

Chapter 13 Eligibility

Chapter 13 bankruptcy isn't for everyone. Because Chapter 13 requires you to use your income to repay some or all of your debt, you'll have to prove to the court that you can afford to meet your payment obligations. If your income is irregular or too low, the court might not allow you to file for Chapter 13.

If your total debt burden is too high, you are also ineligible. Your secured debts cannot exceed $1,010,650, and your unsecured debts cannot be more than $336,900. A "secured debt" is one that gives a creditor the right to take a specific item of property (such as your house or car) if you don't pay the debt. An "unsecured debt" (such as a credit card or medical bill) doesn't give the creditor this right.

The Chapter 13 Process

Before you can file for bankruptcy, you must receive credit counseling from an agency approved by the United States Trustee's office. (For a list of approved agencies, go to the Trustee's website at www.usdoj.gov/ust and click "Credit Counseling and Debtor Education.") These agencies are allowed to charge a fee for their services, but they must provide counseling for free or at reduced rates if you cannot afford to pay.

In addition, you'll have to pay the filing fee, which is currently $274, and file numerous forms. For line-by-line instructions on filling out the required bankruptcy forms, see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Robin Leonard (Nolo).

 

The Chapter 13 Repayment Plan

The most important part of your Chapter 13 paperwork will be a repayment plan. Your repayment plan will describe in detail how (and how much) you will pay each of your debts. There is no official form for the plan, but many courts have designed their own forms.

How Much You Must Pay

Your Chapter 13 plan must pay certain debts in full. These debts are called "priority debts," because they're considered sufficiently important to jump to the head of the bankruptcy repayment line. Priority debts include child support and alimony, wages you owe to employees, and certain tax obligations.

In addition, your plan must include your regular payments on secured debts, such as a car loan or mortgage, as well as repayment of any arrearages on the debts (the amount by which you've fallen behind in your payments).

The plan must show that any disposable income you have left after making these required payments will go towards repaying your unsecured debts, such as credit card or medical bills. You don't have to repay these debts in full (or at all, in some cases). You just have to show that you are putting any remaining income towards their repayment.

 

How Long Your Repayment Plan Will Last

The length of your repayment plan depends on how much you earn and how much you owe. If your average monthly income over the six months prior to the date you filed for bankruptcy is more than the median income for your state, you'll have to propose a five-year plan. If your income is lower than the median, you may propose a three-year plan. (To get the median income figures for your state, go to the United States Trustee's website, www.usdoj.gov/ust, and click "Means Testing Information.")

No matter how much you earn, your plan will end if you repay all of your debts in full, even if you have not yet reached the three- or five-year mark.

 

If You Can’t Make Plan Payments

If for some reason you cannot finish a Chapter 13 repayment plan -- for example, you lose your job six months into the plan and can’t keep up the payments -- the bankruptcy trustee may modify your plan, or the court might let you discharge your debts on the basis of hardship. Examples of hardship would be a sudden plant closing in a one-factory town or a debilitating illness.

If the bankruptcy court won’t let you modify your plan or give you a hardship discharge, you might be able to convert to a Chapter 7 bankruptcy or ask the bankruptcy court to dismiss your Chapter 13 bankruptcy case (you would still owe your debts, plus any interest creditors did not charge while your Chapter 13 case was pending). For information on your alternatives in this situation, see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Robin Leonard (Nolo).

How a Chapter 13 Case Ends

Once you complete your repayment plan, all remaining debts that are eligible for discharge will be wiped out. Before you can receive a discharge, you must show the court that you are current on your child support and/or alimony obligations and that you have completed a budget counseling course with an agency approved by the United States Trustee. (This requirement is separate from the mandatory credit counseling you must undergo before filing for bankruptcy -- you can find a list of approved agencies at the Trustee's website, www.usdoj.gov/ust; click "Credit Counseling and Debtor Education.")

For more information, see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Robin Leonard (Nolo).

 

Are You Eligible for Chapter 13 Bankruptcy?

 

Learn whether Chapter 13 bankruptcy is an option for you.

Chapter 13 bankruptcy is a good option for some debtors, but it isn't available to everyone.

Businesses Can't File for Chapter 13 Bankruptcy

A business, even a sole proprietorship, cannot file for Chapter 13 bankruptcy in the name of that business. Businesses are steered toward Chapter 11 bankruptcy when they need help reorganizing their debts.

If you own a business, however, you can file for Chapter 13 bankruptcy as an individual. You can include in your Chapter 13 bankruptcy case business-related debts for which you are personally liable. There is one exception to this rule: Stockbrokers and commodity brokers cannot file a Chapter 13 bankruptcy case, even if they want to discharge only personal (nonbusiness) debts.

You Must Have Sufficient Disposable Income

In order to qualify for Chapter 13, you will have to show the bankruptcy court that you will have enough income, after subtracting certain allowed expenses and required payments on secured debts (such as a car loan or mortgage), to meet your repayment obligations. Your plan must pay back certain debts in full, or the judge will not confirm (approve) it and allow you to proceed.

You can use the income from the following sources to fund a Chapter 13 plan:

  • regular wages or salary
  • income from self-employment
  • wages from seasonal work
  • commissions from sales or other work
  • pension payments
  • Social Security benefits
  • disability or workers' compensation benefits
  • unemployment benefits, strike benefits, and the like
  • public benefits (welfare payments)
  • child support or alimony you receive
  • royalties and rents, and
  • proceeds from selling property, especially if selling property is your primary business.

If you are married, your income does not necessarily have to be "yours." A nonworking spouse can file alone and use money from a working spouse as a source of income. And an unemployed spouse can file jointly with a working spouse.

Your Debts Must Not Be Too High

You do not qualify for Chapter 13 bankruptcy if your secured debts exceed $1,010,650. (This amount is adjusted for inflation every three years; the last increase took effect on April 1, 2007.) A debt is secured if you stand to lose specific property if you don't make your payments to the creditor. Home loans and car loans are the most common examples of secured debts. But a debt might also be secured if a creditor -- such as the IRS -- has filed a lien (notice of claim) against your property.

In addition, for you to be eligible for Chapter 13 bankruptcy, your unsecured debts cannot exceed $336,900. (This amount is also increased every three years.) An unsecured debt doesn't give the creditor a right to take a particular piece of property.  Most debts are unsecured, including credit card debts, medical and legal bills, back utility bills, and department store charges.

You Must Be Current on Your Income Tax Filings

To file for Chapter 13, you will have to submit proof that you filed your federal and state income tax returns for the four tax years prior to your bankruptcy filing date. If you need some time to get current on your filings, the court can postpone the proceedings. Ultimately, however, if you don't produce your returns or transcripts of the returns for those four years, your Chapter 13 case will be dismissed.

Want to Learn More?

For more information on Chapter 13's eligibility requirements, see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Robin Leonard and Stephen Elias (Nolo).


Your Obligations Under a Chapter 13 Bankruptcy Plan

 

Learn which debts you must pay back when you file for Chapter 13 bankruptcy.

To begin a Chapter 13 bankruptcy, you fill out a packet of forms -- mostly the same forms as you would use in a Chapter 7 bankruptcy -- listing your income, property, expenses, and debts. You file these forms and paperwork with a nearby bankruptcy court. You must also file a workable payment plan proposing how you plan to handle your debts over the payment plan period.

You must also file your tax return for the previous year, proof that you've filed your tax returns for the last four years, and a certificate showing that you've completed credit counseling with an agency approved by the United States Trustee (go to www.usdoj.gov/ust, then click "Credit Counseling and Debtor Education" for a list of approved agencies).

Under a Chapter 13 plan, you make payments, usually monthly, to the bankruptcy trustee, an official appointed by the bankruptcy court to oversee your case. The trustee in turn pays your creditors and collects a statutory commission based on the amounts paid out under your plan. You must make every payment, on time, in order to successfully complete your plan and get a discharge of your remaining debts.

How Much You'll Have to Pay

Some creditors are entitled to receive 100% of what you owe them, while others may receive a much smaller percentage (or nothing at all). Typically, Chapter 13 bankruptcy plans must provide that:

Administrative claims will be paid 100%. These include:

  • your filing fee ($274)
  • the trustee's commission (3% to 10% of each monthly payment), and
  • attorney's fees, if you hire an attorney for help with your Chapter 13 bankruptcy.

Priority debts will be paid 100%. These include:

  • back alimony and child support
  • most tax debts (including state and federal income taxes)
  • wages, salaries, or commissions you owe to employees, and
  • contributions you owe to an employee benefit fund.

Mortgage defaults will be paid 100% if you want to keep your house.

Other secured debt defaults will be paid 100% if you want to keep the property. Missed car payments fall into this category.

Unsecured debts will be paid anywhere from 0% to 100% of what you owe. The exact amount depends on:

  • the total value of your nonexempt property
  • the amount of disposable income you have each month to put toward your debts, and
  • how long your plan lasts.

Disposable Income

Your payment plan must commit to paying any leftover disposable income (your income less certain allowed expenses and payments on secured loans, such as a mortgage or car loan) towards your unsecured debts, such as credit card debts and medical bills.

Length of Payment Plan

The length of your payment plan depends on your income level. If your "current monthly income" (your average income over the six months prior to filing) exceeds the median monthly income for a household of your size in your state, your plan must last five years. If your income is less than the median, you can propose a three-year plan, even if your unsecured creditors cannot be fully repaid during that time. (To find the median income figures for your state, go to the United States Trustee's website, www.usdoj.gov/ust, and click "Means Testing Information.")

 

Your "current" monthly income might be out of date. Because your current monthly income, as calculated above, is an average, it may well be more than your actual monthly income at the time you file. For instance, if you were laid off unexpectedly three months before filing, your monthly income when you file may be quite low -- as compared to your average income over the last six months, which will have to include three months of your salary.

No Surrender of Property

If you file for Chapter 13 bankruptcy, you don't have to hand over any of your property; instead, you repay your debts out of your income. In exchange for getting to keep your property, your plan will have to pay your creditors at least the value of your nonexempt property. (In Chapter 7 bankruptcy, you must surrender your nonexempt property to the trustee, who can sell it and distribute the proceeds to your creditors. You do get to keep property that is exempt.)

For more information on Chapter 13 bankruptcy, see Chapter 13 Bankruptcy: Repay Your Debts, by attorney Stephen Elias and Robin Leonard, J.D.

This copyrighted content provided under a licensure agreement between NOLO and Wallace Law Firm, P.C.

© 2010 Nolo

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Chapter 7

In a Chapter 7 bankruptcy, the debtor turns over all non-exempt property to the bankruptcy trustee who then converts it to cash for distribution to the creditors. The debtor receives a discharge of all dischargeable debts usually within four months.

Chapter 13

In a Chapter 13 bankruptcy, you don't have to hand over any property, but you must use your income to pay some or all of what you owe to your creditors over time -- from three to five years, depending on the size of your debts and income.

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