What should I know about Chapter 13 bankruptcy?

Contents

• What is Chapter 13 bankruptcy?
• What are my rights in Chapter 13?
• What are my responsibiities in Chapter 13?

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What is Chapter 13 bankruptcy?

A Chapter 13 bankruptcy is mainly used by people who have regular sources of income. You would have to pay a portion of your income to your creditors until your debt or a percentage of it has been paid. As in a Chapter 7, a trustee is appointed by the court to handle your property. The advantage of a Chapter 13 is that you would probably be allowed to keep any secured property (like a home or car) where you had fallen behind on the loan.  Generally, creditors receive more money than they would receive from you if you had filed a Chapter 7 bankruptcy. The court must approve your repayment plan.

 

When should I file for Chapter 13?

Since a Chapter 13 bankruptcy involves a long commitment and a payment plan. It makes sense to only file a Chapter 13 bankruptcy case in limited circumstances, such as:

• You own a home with more than $21,500.00 in equity ($43,000.00 if you and your spouse are filing a joint bankruptcy case);

• You are behind on your mortgage and need time to catch up;

• You have received a discharge in a Chapter 7 case within 8 years of needing to file again;

• You have too much income to file a Chapter 7 case; or

• Your main debts are ones that cannot be discharged, but can be spread out over time to give you relief on a monthly basis.

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What are my rights in Chapter 13?

As of 2019, you have the right to file for Chapter 13 if your:

• unsecured debts are less than $419,275, and 

• secured debts are less than $257,850. 

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What are my responsibilities in Chapter 13?

Before you file a bankruptcy case, you are responsible for participating in credit counseling. 

 

A Chapter 13 lasts from three to five years, but no longer than five years from the date of filing of the bankruptcy. You must strictly follow the repayment plan. For a Chapter 13 case to work, you are responsible for showing that you make enough income to make the payments in your payment plan. These payments will include monthly fees to the bankruptcy trustee. The court will dismiss your Chapter 13 case if you cannot show that you have the ability to make your payments going forward. 

 

You cannot borrow money without the court’s permission while the Chapter 13 plan is going on. All of your disposable income after your household and living expenses must go towards paying back your creditors. Only about a third of people who file Chapter 13 bankruptcy are able to complete payments and get a discharge of their other debts.

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Contents

• How can I file for Chapter 13?
• What happens after I file for Chapter 13?
• Can I keep my car in Chapter 13?
• Can I keep my house in Chapter 13?

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How can I file for Chapter 13?

Filing for bankruptcy is a complicated process. You should talk to an attorney before filing. If a court dismisses your case because you did not file correctly, you may be banned from filing again for a period of time. The general steps to filing a Chapter 13 bankruptcy are:

 

1. Within 180 days before filing for bankruptcy, you must participate in credit counseling. Counseling must be with an approved credit counseling agency. You must file a copy of your certificate of credit counseling and a copy of any debt repayment plan with your petition for bankruptcy.

2. File a petition with the bankruptcy court where you live. There are many forms must fill out. You must provide information about your financial situation, including:

   1. A list of all creditors and the amount and nature of their claims;

   2. The source, amount, and frequency of your income;

   3. A list of all of your property; and

   4. A detailed list of your monthly living expenses. Expenses include food, clothing, shelter, utilities, taxes, transportation, medicine, and more.

3. Unless the court grants an extension, you must file a repayment plan with your petition or within 14 days after the petition is filed. The plan proposes a fixed amount that you will pay to a trustee each month to repay your creditors. Your plan must be approved by the court.

4. You must pay the filing fees ($235 case filing fee and $75 administrative fee). You may apply to pay these fees in installments, or if you are unable to pay, the court may waive the fees entirely.

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What happens after I file for Chapter 13?

• Automatic Stay. Filing a petition will automatically stay most collection actions. The stay is like a protective shield that goes up around you at the moment the bankruptcy case is filed. While the stay is in place, creditors are not allowed to: 

  • attempt to collect against you or 

  • take your property unless they first get permission from the bankruptcy court. 

If you’ve been sued or garnished, any action being taken against you has to stop, unless the creditor gets permission from the bankruptcy court. 

• Trustee Appointed. After your petition is filed, you will be assigned a case trustee to: 

  • evaluate your case, 

  • collect payments from you and 

  • distribute them to your creditors.

• Payment on Debt. Within 30 days after filing your bankruptcy case, even if your plan has not been approved by the court, you must start making plan payments to the trustee.

• Meeting of Creditors. Between 21 and 50 days after you file your petition, your case trustee will hold a meeting of your creditors. During this meeting, you will be put under oath.  The trustee and any creditors who attend can ask questions about your proposed plan to repay the debt. You must attend this meeting.

• Hearing on Repayment Plan. No more than 45 days after the creditor meeting, the court will hold a confirmation hearing to decide whether to approve or reject your plan. If the court objects your repayment plan, you can file a modified plan.

• Continue Payments for Three to Five Years. After the court approves the plan, you must make regular payments to the trustee either directly or through a payroll deduction. If you fail to make payments, the court may dismiss the case or convert it to a Chapter 7 liquidation.  The court might also dismiss your case if you fail to pay child support, alimony or file your taxes. 

• Discharge. If you complete all of your payments under your repayment plan, you will generally receive a discharge of allowable debts. This means that even if you have not paid your debts in full, you will no longer owe those creditors money.

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Can I keep my car in Chapter 13?

A Chapter 13 case often offers options if you need some help saving your car. For instance, if you have already fallen behind on your payments, you can catch back up on your car note through the Chapter 13 payment plan. This ability to catch back up sometimes works even if your car was already repossessed. In order to get the car back from repossession (called a “turnover”): 

• the repossession must have occurred within 90 days of the bankruptcy filing, and 

• you will need to make “adequate protection” payments to the lender until the court finalizes your Chapter 13 payment plan. 

 

Another powerful tool in a Chapter 13 case is called the “cramdown.” If you owe more money on the car than it is worth, and you purchased it more than 2 ½ years before your bankruptcy filing, you may be eligible for a cramdown. With a cramdown, you can pay the lender only the value of the vehicle, rather than the full loan balance, through the payment plan. Under a cramdown, you can also sometimes reduce the interest rate to make the remaining balance more affordable. For example, let’s say you purchased your car 3 years ago, you owe $20,000 on the note, there is an interest rate of 28%, and the car is worth $10,000. A cramdown would allow you to pay only the $10,000 that the car is worth, rather than the entire loan balance and you could reduce the interest rate.

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Can I keep my house in Chapter 13?

People who are trying to save a home from foreclosure usually think about filing a Chapter 13 case. In a Chapter 13 bankruptcy, you can use the 3 to 5 year payment plan to get caught up on the past-due mortgage payments. However, you have to be able to make your regular mortgage payment on time beginning the month after you file bankruptcy.

 

For example, let’s say you are 8 months behind on your mortgage and your mortgage is $1,000 per month. You owe a total of $8,000 to bring the loan current. If you filed a Chapter 13 bankruptcy, then beginning the next month you would make your regular monthly payment of $1,000 to the mortgage company. You would also send a separate check each month to the bankruptcy trustee. This monthly payment has to be enough to catch up the $8,000 in back payments over the term of your bankruptcy payment plan. The payment plan will be at least 3 years and no more than 5 years long). In order for a Chapter 13 case to be successful, you have to have enough income to make your regular mortgage payment plus an extra payment to the bankruptcy trustee every month. The court will dismiss your Chapter 13 case if you cannot show that you have the ability to make both payments going forward.

 

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