A Comprehensive Guide to Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a form of personal bankruptcy that allows individuals with regular income to restructure their debts and create a payment plan to repay their creditors over a period of three to five years. In this guide, we’ll cover the basics of chapter 13 bankruptcy, including eligibility requirements, the process, and what to expect.

Eligibility Requirements

If you have less than $2,750,000 in debt—including both the money you owe that is backed up by a property, such as a mortgage, and the debt without any property backing, such as a credit card— then you can apply for chapter 13 bankruptcy.

You can find this law in the Bankruptcy Code at 11 U.S.C. § 109(e).

The maximum debt limit to be eligible for Chapter 13 bankruptcy increased to $2,750,000, and applies retroactively starting from March 27, 2020. This is a significant increase from the old limit, which required you to have less than $465,275 of unsecured debt and less than $1,395,875 of secured debt to be eligible for Chapter 13 bankruptcy.

The name of the act is the Bankruptcy Threshold Adjustment and Technical Corrections Act.

In addition, if you filed a Chapter 7 bankruptcy four years prior to your current Chapter 13 petition or a Chapter 13 petition two years before your current one, you will not receive a discharge.

You can find this law in the Bankruptcy Code at 11 U.S.C. § 1328(f).

The Means Test for Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, the means test is used to determine how much of your income can be used to pay back your creditors over a period of three to five years. Your disposable income, which is the money you have left over after paying certain expenses, is calculated using this test. This amount is then used to establish your repayment plan, which must be approved by the court. If a debtor’s income is higher than the median income in their state, the means test determines which expenses are allowed and should be used to determine how much you should pay back.

You can find this law in the Bankruptcy Code at §§ 1325(b)(1)(B) and (b)(4).

The Process of Filing for Chapter 13 Bankruptcy

The process of filing for chapter 13 bankruptcy begins with filling out several necessary forms, including the bankruptcy petition, schedules, and a proposed repayment plan. These forms must be filed with the bankruptcy court in the district where you live.

The cost to file for Chapter 13 bankruptcy is $313 and must be paid at the time of filing.

Automatic Stay

One of the benefits of filing for chapter 13 bankruptcy is the automatic stay, which stops all collection efforts by creditors. This means that creditors cannot take any action to collect debts, including foreclosure, repossession, or wage garnishment, while the bankruptcy case is pending.

The automatic stay gives the debtor a breathing room and allows them to catch up on overdue payments, restructure debts, and work towards a fresh start. It also prevents creditors from contacting the debtor to demand payment, making it easier for the debtor to focus on the bankruptcy process and getting back on track.

The automatic stay is not absolute, and there are some exceptions to its protection. It does not prevent criminal proceedings or collection of child support or certain types of taxes. In addition, creditors can ask the court to stop or lift the automatic stay if they have a valid reason, such as fraud, misrepresentation, or if the debtor fails to make payments under the Chapter 13 plan. Nonetheless, the automatic stay remains one of the most valuable protections afforded to debtors in Chapter 13 bankruptcy, and it can provide much-needed relief and peace of mind during a difficult financial time.

You can find laws about the automatic stay in the Bankruptcy Code at 11 U.S.C. § 362.

The Role of the Trustee in Chapter 13 Bankruptcy

When you file for Chapter 13 bankruptcy, a trustee will be assigned to your case. The trustee’s primary responsibility is to administer your bankruptcy case and ensure that you comply with all requirements of your court-approved repayment plan. The trustee will review your repayment plan to ensure that it meets the legal requirements of Chapter 13 bankruptcy and is doable given your income and expenses. If the trustee determines that the plan is feasible and in compliance with the bankruptcy laws, he or she will recommend it to the court for approval.

They will also act as a mediator between you and your creditors, and will receive your monthly payments and distribute them to your creditors according to the terms of your plan. The trustee will also monitor the debtor’s financial situation throughout the repayment period and make recommendations to the court if there are any changes in the debtor’s income or expenses that may impact the repayment plan. Additionally, the trustee has the power to object to any claim made by a creditor that is not in compliance with the Bankruptcy Code or the terms of the repayment plan. The trustee’s role is to ensure that the debtor is able to repay his or her debts in a fair and reasonable manner while protecting the rights of all parties involved in the bankruptcy process.

What Debts Can Be Discharged in a Chapter 13 Bankruptcy Case?

In a Chapter 13 bankruptcy case, certain debts can be discharged, meaning they will be eliminated once the debtor completes the payment plan. Generally, debts that can be discharged in a Chapter 13 bankruptcy case include unsecured debts, such as credit card debts, medical bills, and personal loans.

In addition to unsecured debts, certain secured debts may also be discharged in a Chapter 13 bankruptcy case. Secured debts are those that are backed by collateral, such as a car or a house. If the debtor is unable to make payments on a secured debt, the lender may repossess or foreclose on the collateral. However, in a Chapter 13 bankruptcy case, the debtor can propose a repayment plan that allows them to keep the collateral and pay back the debt over time. If the debtor completes the payment plan, any remaining balance on the secured debt may be discharged. This can be a valuable option for debtors who want to keep their homes or cars but are struggling to make payments. It is important to note that the discharge of secured debts in Chapter 13 bankruptcy is subject to certain limitations, and a bankruptcy attorney can provide guidance on how to navigate the process successfully.

What Debts Cannot Be Discharged?

While Chapter 13 bankruptcy can provide a fresh start for individuals struggling with debt, there are certain types of debts that cannot be discharged through this process. These include most tax debts, student loans, and debts arising from divorce or separation agreements, such as child support and alimony.

It is important to note that even if a debt is not dischargeable, it can still be included in the payment plan and be paid off over time.

The Meeting of Creditors

The trustee will also conduct a meeting of creditors, similar to the one held in Chapter 7 bankruptcy, where they will ask you questions about your finances and your proposed repayment plan. They may also request additional documentation or information from you to verify the accuracy of the information you provided in your bankruptcy forms. It is important to cooperate fully with the trustee and provide all requested information to ensure the smooth administration of your case.

The Repayment Plan

The repayment plan is the heart of chapter 13 bankruptcy. This plan details how the individual will repay their debts over the course of three to five years. It typically includes all of the debtor’s debts, both secured and unsecured, and outlines how much the debtor will pay each creditor every month. The plan must provide for full payment of all priority debts, such as taxes and child support, and at least a percentage of non-priority unsecured debts.

The repayment plan must also take into account the debtor’s disposable income, which is the amount of money the debtor has left over each month after paying for their necessary living expenses.

Confirmation and Payments

Once the repayment plan is approved by the court, the debtor must make regular payments to a bankruptcy trustee, who will distribute the payments to creditors according to the plan. These payments must be made on time, and any missed payments can result in the case being dismissed.

Completion of the Plan

Once the debtor has made all of the required payments under the plan, the bankruptcy court will issue a discharge order. This discharge is a court order that eliminates the individual’s obligation to repay those debts, and it is the goal of the bankruptcy process. This discharge can provide a significant amount of relief for debtors who were struggling to make ends meet before filing for bankruptcy.

It is important for debtors to continue to meet their ongoing financial obligations, such as paying their mortgage or rent, and to maintain a good credit score after the completion of the plan.

Conclusion

Chapter 13 bankruptcy can be a valuable tool for individuals with regular income who are struggling with debt. By creating a repayment plan and receiving a discharge of eligible debts, individuals can regain control of their finances and move forward with a fresh start. If you are considering chapter 13 bankruptcy, it’s important to consult with an experienced bankruptcy attorney to understand your options and ensure that the process goes smoothly.