Chapter 13: A Basic Overview

Chapter 13 Bankruptcy, also known as debt reorganization, is a type of bankruptcy that involves the court restructuring debts to make payments more feasible for the debtor. Chapter 13 is one of two common forms of personal bankruptcy – Chapter 7 and Chapter 13. As opposed to Chapter 7, debts in a Chapter 13 bankruptcy are repaid instead of being cancelled. Also unlike Chapter 7, in a Chapter 13 the debtor does not lose any property. The basic result of a Chapter 13 is a structured repayment plan which would be much easier for you to manage.

Who Can File?

The court has set strict eligibility requirements for Chapter 13 bankruptcies. To file, a debtor must be able to verify to the court that they fully meet the eligibility requirements. In Chapter 13, you must have the ability to repay your debts using the payment plan. As a result, one of the main eligibility requirements is that you have a steady and substantial source of income. Individuals with incomes that are not high enough or are too unpredictable will not be allowed to proceed with a Chapter 13 filing. On top of the income requirements, there are also debt limits that must be met in order to file. Check with your local bankruptcy court to find out the current debt limits.

How Does A Repayment Plan Work?

If you decide to file for Chapter 13, you will inevitably have to repay a substantial amount of your debts. Before you get started, it is imperative that you understand how the repayment plan works. When you file for Chapter 13, you will actually be responsible for using the local bankruptcy court’s guidelines to design your own provisional detailed repayment plan and submit it with your paperwork. Your proposal will be subject to the review and revision of the bankruptcy court. After a repayment plan has been decided by the court, you will be assigned a trustee. The trustee will be responsible both for collecting payments from you and distributing funds to creditors throughout the repayment plan.

How Much and For How Long?

The amount of debts that end up on your repayment plan depends on court requirements as well as your level of income. Under a Chapter 13, the bankruptcy court requires that “priority debts” are paid in full – such as child support, wages, and any taxes that are owed. Secured debts, namely car loans and mortgages, must also continue being paid regularly in order for the property to be kept. Unsecured debts, on the other hand, only must be paid to the extent that your income allows. In order to continue your repayment plan, you must prove that your disposable income (leftover income after required expenses and plan payments) is being put towards your unsecured debts. As a result, you could end up paying anywhere from 0% to 100% of your unsecured debt, depending on your income level.

The length of your repayment plan also depends on your income level. By current standards, repayment plans last either three years or five years. If your monthly income is below the median income for your household size, you have the option to propose a three-year plan. If your income exceeds that median income restriction, however, you are required to complete a five-year plan. Once the repayment plan has ended, your remaining debts will be discharged by the bankruptcy court, assuming you made all required payments.

The Filing Process

Apart from the repayment plan, you must also provide the court with several forms of paperwork surrounding your Chapter 13 bankruptcy. For one, you will have to file a petition – the official request for bankruptcy. You will also have to provide forms and information related to your income, assets, and debts, along with the repayment plan proposal. Federal law also requires that anyone filing bankruptcy complete a credit counseling course. You will need to submit a certificate verifying that you completed one.

Getting Started

If you are interested in filing a Chapter 13 bankruptcy, having the information you need at your fingertips is key. If possible, get in touch with a bankruptcy lawyer that has the experience and knowledge to give you the advice and legal representation you may need. If and when you do decide to file, having a lawyer will be handy – also be prepared to pay a moderate filing fee, and have all the necessary information ready.