What Is Chapter 13 Bankruptcy – Quick Bankruptcy Guide
If you feel overwhelmed by the weight of your debt but still have a reliable, steady source of income, you could file for Chapter 13 bankruptcy to relieve your financial situation. Here are the basics you need to know.
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is a type of bankruptcy that allows debtors to repay all or a significant portion of their debts within three to five years under a court-ordered plan. Some of the most common debts typically discharged in a Chapter 13 case include credit card debt, medical bills, and personal loans.
How Chapter 13 Bankruptcy Works
To be eligible to file for Chapter 13, an individual must have no more than $1,257,850 in secured debts (e.g., car loans and mortgages) and no more than $419,275 in unsecured debt (e.g., personal loans and credit card bills). Keep in mind that the exact figures change periodically in accordance with the consumer price index. You also need to offer proof that you have sufficient income to meet both your living expenses and the monthly installments of the repayment plan.
Once you’ve filed your official bankruptcy forms and paid the filing fee, you’ll have to present a certificate that you have received a mandatory credit counseling course from one of the agencies approved by the U.S. Trustee’s office.
The focal point of your Chapter 13 bankruptcy case is the repayment plan that you have to propose for the court and your creditors to approve. Both the bankruptcy trustee you have been assigned and the creditors will have the opportunity to object to your plan.
Unlike other bankruptcy chapters, with Chapter 13, the trustee won’t sell your property. Instead, it falls on you to develop a plan to pay back the creditors over a period of time. Once the court confirms your plan during a confirmation hearing, the creditors can no longer object to it, and it goes into effect. However, your payments will begin right after you file, not after the confirmation.
Since the repayment period can be up to five years, it’s plausible that you can experience many financial changes in the meantime. That, however, does not automatically give you an out of the repayment plan. For example, if your income decreases, you might be allowed to modify the amount you pay to your creditors. In case you can’t pay the required debt, there is the possibility of the court discharging your debts due to hardship (e.g., due to debilitating illness). There are instances when you might be able to switch from Chapter 13 to Chapter 7 bankruptcy (where all unsecured debt gets cleared), but that will have serious consequences that you need to consider in advance. In these situations, it’s best to consult with a lawyer on the best course of action.
How a Chapter 13 Case Ends
After you complete your Chapter 13 bankruptcy repayment plan, you have to appear before the court and prove that you are current on your alimony obligations and child support, as well as that you have completed any other requirements, including a counseling course. If you meet all requirements, any remaining balance on your qualifying dischargeable debt will be wiped out, and you will thus become debt-free. Of course, you will still have to pay any unqualifying debt, such as student loans and mortgages.
Navigating the U.S. Bankruptcy Law can be difficult and challenging. To ensure you’re filing the right type of bankruptcy and following all requirements, it’s best to consult with a legal professional. Browse through the Legal Chiefs network of experienced attorneys to find an attorney for your case!
Bankruptcy FAQ
Bankruptcy is a section of the law that allows debtors who are unable (fully or partially) to pay their outstanding debts to get a fresh start and get financial relief. Keep in mind that not all debts qualify to be removed in a bankruptcy case (e.g., student loans). The U.S. Supreme Court explains bankruptcy law as a way to give individuals and entities a new opportunity in life by starting fresh without the pressure and discouragement of preexisting debt. Federal bankruptcy law consists of chapters published in the Bankruptcy Code.
The U.S. Bankruptcy Law covers six different types of bankruptcy, each described in a separate chapter in the Bankruptcy Code. Although they differ in terms and procedures, their common goal is to provide permanent relief from certain outstanding debts. In other words, they help to discharge the debtor’s dischargeable debts. These are the different types of bankruptcy you can file:
Chapter 7: This chapter provides liquidation of the non-exempt assets of the debtor. Certain assets, like a car or a home, may be exempt from bankruptcy, which means the debtor can likely keep them under this chapter. The court appoints a trustee who will oversee the debtor’s non-exempt assets and will handle their sale. The proceeds will go to the creditors. Chapter 7 is open both to individuals and businesses.
Chapter 9: This chapter is intended to help municipalities to reorganize their debts. It is open to towns, cities, villages, municipal utilities, taxing districts, and school districts.
Chapter 11: Intended to help partnerships and corporations, chapter 11 bankruptcy aims to provide a supervised reorganization of a business by allowing the debtor to keep running the business while following a court-ordered payment plan.
Chapter 12: It consists of bankruptcy provisions for family farmers and fishers.
Chapter 13: It is aimed at helping individuals with a steady regular income to create a repayment plan, usually within three to five years, and discharge the remaining dischargeable debt.
Chapter 15: This chapter applies to cross-border bankruptcies that involve foreign parties.
Since bankruptcy can have a lasting negative effect on your credit, you should consider it a last resort option. It is a good idea to hold off on filing if you believe there is a chance to improve your financial situation or that you will have substantial expenses in the near future because there is a limit to how often you can file for bankruptcy.
The moment you file for bankruptcy, this will trigger an automatic stay that will stop wage garnishment, lawsuits, foreclosure, and collection efforts. So, if you want to stop the repossession of your car or the foreclosure of your home, and you have the income to pay off that debt, it may be a good idea to file for Chapter 13, for example. Of course, you should ideally consult with a lawyer before you take any legal action.
Is there a specific amount of debt to qualify for bankruptcy?
Generally speaking, there is no preset minimum amount of debt you need to qualify for bankruptcy. However, certain debt limits apply to Chapter 13, for instance. The maximum amount changes constantly, but it currently is $383,175 for unsecured debt and $1,149,525 for secured debt. If your outstanding debt is relatively low, it’s wise to consider alternative solutions to bankruptcy to ensure that filing for one of the six chapters is still an option for you in the near future. It’s an important consideration because there are limits on how many times a person can discharge debts in bankruptcy.
It is possible, but it depends on the type of debt you have. Most consumer debt can be discharged in a bankruptcy case, but if you forget to include a debt in the process of filing, it will not be discharged. In addition to that, creditors have the right to object to the discharge of any debt.
There are 19 categories of non-dischargeable debts that cannot usually be eliminated (unless a creditor decides not to challenge your effort to discharge them). Some of them include child support, alimony, certain tax debts, criminal restitution, and condo fee debts.
Do I need a lawyer to file for bankruptcy, or can I do it on my own?
It is allowed for individuals to file for bankruptcy without a lawyer. Debtors who decide not to use legal help in the filing process are responsible for understanding local court procedures and what relevant bankruptcy laws apply to them. In general, however, bankruptcy law is very complex and can be confusing. Understanding the process is key, and it is a good idea to consult with a bankruptcy lawyer about your circumstances to ensure you get the best outcome.
