The basic steps
involved in a typical Chapter 13 bankruptcy case.
Chapter 13 bankruptcy,
sometimes called reorganization bankruptcy, is quite
different from Chapter 7 bankruptcy. In a Chapter
7 bankruptcy, most of your debts are wiped out; in
exchange, you must relinquish any property that isn't
exempt from seizure by your creditors. In a Chapter
13 bankruptcy, you don't have to hand over any property,
but you must use your income to pay some or all of
what you owe to your creditors over time -- from
three to five years, depending on the size of your
debts and income.
Chapter 13 Eligibility
Chapter 13 bankruptcy
isn't for everyone. Because Chapter 13 requires you
to use your income to repay some or all of your debt,
you'll have to prove to the court that you can afford
to meet your payment obligations. If your income
is irregular or too low, the court might not allow
you to file for Chapter 13.
If your total debt
burden is too high, you are also ineligible. Your
secured debts cannot exceed $1,010,650, and your
unsecured debts cannot be more than $336,900. A "secured debt" is one that gives a creditor the right to take a specific item of property (such
as your house or car) if you don't pay the debt.
An "unsecured debt" (such as a credit card or medical bill) doesn't give the creditor this right.
The Chapter 13 Process
Before you can file
for bankruptcy, you must receive credit counseling
from an agency approved by the United States Trustee's
office. (For a list of approved agencies, go to the
Trustee's website at www.usdoj.gov/ust and click "Credit Counseling and Debtor Education.") These agencies are allowed to charge a fee for their services, but they must
provide counseling for free or at reduced rates if
you cannot afford to pay.
In addition, you'll
have to pay the filing fee, which is currently $274,
and file numerous forms. For line-by-line instructions
on filling out the required bankruptcy forms, see
Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Robin Leonard (Nolo).
The Chapter 13 Repayment Plan
The most important
part of your Chapter 13 paperwork will be a repayment
plan. Your repayment plan will describe in detail
how (and how much) you will pay each of your debts.
There is no official form for the plan, but many
courts have designed their own forms.
How Much You Must Pay
Your Chapter 13 plan
must pay certain debts in full. These debts are called "priority debts," because they're considered sufficiently important to jump to the head of the
bankruptcy repayment line. Priority debts include
child support and alimony, wages you owe to employees,
and certain tax obligations.
In addition, your
plan must include your regular payments on secured
debts, such as a car loan or mortgage, as well as
repayment of any arrearages on the debts (the amount
by which you've fallen behind in your payments).
The plan must show
that any disposable income you have left after making
these required payments will go towards repaying
your unsecured debts, such as credit card or medical
bills. You don't have to repay these debts in full
(or at all, in some cases). You just have to show
that you are putting any remaining income towards
their repayment.
How Long Your Repayment Plan Will Last
The length of your
repayment plan depends on how much you earn and how
much you owe. If your average monthly income over
the six months prior to the date you filed for bankruptcy
is more than the median income for your state, you'll
have to propose a five-year plan. If your income
is lower than the median, you may propose a three-year
plan. (To get the median income figures for your
state, go to the United States Trustee's website,www.usdoj.gov/ust,
and click "Means Testing Information.")
No matter how much
you earn, your plan will end if you repay all of
your debts in full, even if you have not yet reached
the three- or five-year mark.
If You Can’t Make Plan Payments
If for some reason
you cannot finish a Chapter 13 repayment plan --
for example, you lose your job six months into the
plan and can’t keep up the payments -- the bankruptcy
trustee may modify your plan, or the court might
let you discharge your debts on the basis of hardship.
Examples of hardship would be a sudden plant closing
in a one-factory town or a debilitating illness.
If the bankruptcy
court won’t let you modify your plan or give you
a hardship discharge, you might be able to convert
to a Chapter 7 bankruptcy or ask the bankruptcy court
to dismiss your Chapter 13 bankruptcy case (you would
still owe your debts, plus any interest creditors
did not charge while your Chapter 13 case was pending).
For information on your alternatives in this situation,
see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Robin Leonard (Nolo).
How a Chapter 13 Case Ends
Once you complete
your repayment plan, all remaining debts that are
eligible for discharge will be wiped out. Before
you can receive a discharge, you must show the court
that you are current on your child support and/or
alimony obligations and that you have completed a
budget counseling course with an agency approved
by the United States Trustee. (This requirement is
separate from the mandatory credit counseling you
must undergo before filing for bankruptcy -- you
can find a list of approved agencies at the Trustee's
website, www.usdoj.gov/ust; click "Credit Counseling and Debtor Education.")
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