Chapter 13 bankruptcy allows individuals with regular income to develop a plan to repay all or part of their debts over a period of three to five years. Chapter 13 bankruptcy is often used when an individual is not eligible to file a Chapter 7 because their income is too high, they have nonexempt property they want to keep from liquidation or they need to cure a mortgage default. In all cases, Chapter 13 bankruptcy is likely a better option for people not able to file a Chapter 7 then not filing bankruptcy at all. The alternatives of debt consolidation or borrowing against their home or retirement accounts is almost never a better idea then the Chapter 13.
Key Aspects of Chapter 13 Bankruptcy
- Eligibility:
- To file for Chapter 13, the debtor must have a regular source of income.
- There are debt limits: unsecured debts must be less than $465,275 and secured debts less than $1,395,875 (as of 2024). These limits are periodically adjusted.
- Filing Process: In most ways the process of filing Chapter 13 is identical to filing Chapter 7.
- Petition and Documents: The debtor files a petition with the bankruptcy court, along with schedules of assets and liabilities, current income and expenses, and a statement of financial affairs.
- Automatic Stay: Upon filing, an automatic stay goes into effect, preventing creditors from taking collection actions against the debtor.
- Credit Counseling: Debtors must complete a credit counseling course before filing and submit a repayment plan for court approval.
- The Repayment Plan:
- Length of Plan: The repayment plan typically lasts three to five years. The length depends on the debtor’s income relative to the median income in their state.
- If the debtor’s income is above the median, the plan usually lasts five years.
- If the debtor’s income is below the median, the plan can last three years.
- Plan Payments: Payments are made monthly to a Chapter 13 trustee, who then distributes the funds to creditors according to the approved plan.
- Determining Payment Amount: The payment amount is based on the debtor’s disposable income, which is calculated by subtracting allowable expenses (such as living costs, taxes, and necessary insurance) from the debtor’s income. The debtor is required to pay all disposable income into the plan over its duration.
- Length of Plan: The repayment plan typically lasts three to five years. The length depends on the debtor’s income relative to the median income in their state.
- Treatment of Claims:
- Secured Claims:
- Mortgages: Mortgage payments on the debtor’s primary residence must be kept current during the plan. The debtor may catch up on any missed payments (arrears) over the course of the plan. However, the mortgage itself is usually not discharged at the end of the plan.
- Car Loans: Car loans are also treated as secured claims. The debtor may be able to “cram down” the loan if the car was purchased more than 910 days before the bankruptcy filing. This means the debtor can pay the current value of the car, rather than the full loan balance, through the plan.
- Priority Unsecured Claims: Certain unsecured claims, like child support, alimony, and certain taxes, must be paid in full over the plan’s duration.
- General Unsecured Claims: Credit card debt, medical bills, and other general unsecured debts may receive partial payment, depending on the debtor’s disposable income. The remaining balance is discharged at the end of the plan, except those debts not dischargeable in bankruptcy, such as student loans.
- Secured Claims:
- Plan Confirmation:
- The bankruptcy court must confirm (approve) the repayment plan. Creditors can object to the plan, but if the court finds the plan is feasible and meets the requirements of the Bankruptcy Code, it will be confirmed.
- Completion and Discharge:
- If the debtor successfully completes the repayment plan, they receive a discharge of any remaining unsecured debts (unless otherwise nondischargeable, like student loans). Secured debts like mortgages or car loans that weren’t paid off in full during the plan will still need to be paid according to their original or modified terms.
- Post-Confirmation:
- After the plan is confirmed, the debtor must make all plan payments on time. If circumstances change, the debtor may request a plan modification, which must be approved by the court.
Advantages of Chapter 13
- Avoids Foreclosure: Allows debtors to stop foreclosure proceedings and catch up on missed mortgage payments.
- Debt Restructuring: Provides an opportunity to restructure secured debts, potentially lowering payments.
- Debt Discharge: Unsecured debts that aren’t paid in full during the plan are discharged (unless nondischargeable, e.g. student loans), offering relief from overwhelming debt.
Chapter 13 is often chosen by individuals who have a steady income and want to keep their assets while reorganizing their financial obligations. It requires careful budgeting and commitment to the repayment plan, but it offers a path to regain financial stability over time.
