Chapter 13 Bankruptcy

Chapter 13 bankruptcy is often considered the best bankruptcy route because when all is said and done you will have paid your creditors back the money that you owed them. Chapter 13 bankruptcy is also known as reorganization bankruptcy and is very different from Chapter seven bankruptcy that allows applicants to essentially erase all of their debts and start again. When you file for Chapter 13 bankruptcy you are agreeing to use your income to pay some or even all of what you owe over an extended period of time. You'll typically pay your debts off over three to five years, but this varies depending on the income to debt ratio.

Who can file for Chapter 13 bankruptcy?

Not everyone can file for Chapter 13 bankruptcy because it requires the applicant to repay some or all of the debt. If you cannot adequately prove to the court that you can make all of your payments, the court might deny your application. If your income is very low or very irregular, or if your debt exceeds the allowed cap, the court will often advise you to file for Chapter seven bankruptcy. The court has a cap of $922,975 for your secured debts and a maximum of $307,675 for unsecured debts.

What is the filing process?

Before you actually file for Chapter 13 bankruptcy you'll need to complete credit counseling from an approved agency. The United States Trustee approves these agencies and you can find a list of them by visiting www.usdog.gov/ust and clicking on the "Credit Counseling and Debtor Education link. You might find that several of these agencies will provide you with credit counseling for free or at a drastically reduced rate. Once you've completed the credit counseling, you'll receive a certificate that you will need to provide to the court. You'll also need to fill out a few forms for the court that specifies who you owe and what you owe them, what you earn, and also what you spend. The court will require a copy of your federal tax return for the previous year as well as proof that you have filed your state and federal taxes for the last four years. You'll also be required to submit a Chapter 13 repayment plan to demonstrate for the court how you will pay off your debts. Unfortunately, filing for Chapter 13 bankruptcy isn't free, so you'll need to come up with the $189 filing fee as well.

Chapter 13 works out a debt repayment plan

What is the repayment plan?

The repayment plan is often considered the most important form in the Chapter 13 bankruptcy packet of forms, as it will really get detailed as to how you plan to pay off your debts. You may have to use your own words, as there isn't an official Chapter 13 repayment form, although some courts have made their own to help streamline the process.

It's important for those filing for Chapter 13 bankruptcy to know that the court expects them to begin making payments according to their repayment plan within 30 days of the date that the plan was filed. You'll likely be told to make the payments to the bankruptcy trustee, and then the trustee will be responsible for distributing the money accordingly. To make the process even easier, you'll find that the bankruptcy court likes to deduct your monthly payments from either your earned wages or your bank account so that there is no delay for mail or human error.

What are you required to pay?

There are certain debts that the court will require for you to pay in full and these are typically debts related to child support or alimony, monies owed to employees, and taxes. These items are known as priority debts and they are placed before any other debts and are required to be paid in full regardless of your financial situation. You will also be required to make regular payments to items such as car and house payments.

You will also be required to show the court how much extra or disposable income you have left after you've made all of the above-mentioned payments. Any disposable income will likely be put toward credit card and medical bills, though you will not be required to pay off these items completely. While these items do not ever have to be paid off, you do have to show the court that you are making a concerted effort to pay off all of your debt and that you aren't out spending frivolously on other items while creditors are going unpaid.

How long should you expect to pay on your plan?

You will have to compare the median income in your state to your income to decide how long your repayment plan will last. If your average monthly income before the date you filed for your bankruptcy is higher than the median income the length of your repayment plan will be less than if your income for the six months before you filed was less than the median income for your state. You can always attempt to bring your repayment plan to a close sooner, by paying a little more each month. As soon as all of your debts are paid in full, your plan will end.

If you cannot make your payments, your plan can be modified. The trustee will often give you a grace period of the lack of payments seems temporary, reduce your payments, or even extend the repayment period to accommodate your financial needs. In very rare instances the court can decide to discharge the debts altogether on the basis of hardship, though this is typically not the case. If the court will not let you modify the repayment plan for some reason, you can always modify your filing to a chapter seven in which all of your debts are washed away by the court.

When will your Chapter 13 bankruptcy case come to an end?

Your Chapter 13 bankruptcy case will come to an end when you have completed your repayment plan, you can show the court that you are current on all taxes, alimony, or child support, and you've completed a budgeting course that will help you avoid the bankruptcy process in the future.

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