Learn about Chapter 13 bankruptcy and how it allows people with regular incomes to restructure their debts and pay them off over time.
What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is a type of bankruptcy that allows individuals with a steady income to create a plan to repay all or part of their debts over three to five years. Also known as a wage earner’s plan, this type of bankruptcy is often chosen by individuals with a regular income but struggle to pay debt.
When filing for Chapter 13 bankruptcy, the debtor is required to propose a detailed repayment plan to the court. This plan outlines how the debtor intends to pay off their debts over the specified period. Once the court approves the plan, the debtor regularly pays a trustee. The trustee then distributes these funds to the creditors as the approved plan outlines.
Chapter 13 bankruptcy can help individuals avoid foreclosure on their homes, catch up on missed mortgage payments, and consolidate debts into more manageable payments. It also allows debtors to keep their assets while still working towards repaying their debts.
Who Is Eligible for Chapter 13 Bankruptcy?
According to the U.S. Bankruptcy Code, any person, even if self-employed or operating an unincorporated business, is eligible to file for Chapter 13 bankruptcy. As long as their combined total secured and unsecured debts are less than $2,750,000 as of the filing date, they can qualify for Chapter 13 relief. It is often used by individuals with a steady income who struggle to meet their financial obligations. It allows them to create a repayment plan to catch up on debts over three to five years. However, eligibility requirements can vary, so it’s recommended to consult with a bankruptcy attorney to determine if Chapter 13 bankruptcy is a suitable option for your specific financial situation.
What are the Benefits of Filing for Chapter 13 Bankruptcy?
Bankruptcy under Chapter 13 has several advantages, including:
- Debt consolidation: Chapter 13 bankruptcy allows individuals to consolidate their debts into a manageable repayment plan over three to five years, making catching up on missed payments easier.
- Protection from foreclosure and repossession: One of the most significant benefits of filing for Chapter 13 is that it can halt foreclosure proceedings on your home and repossession of your vehicle, giving you the opportunity to catch up on missed payments.
- Reduced debt: Through the repayment plan, some of your debts may be reduced or discharged, such as a second mortgage, paving the way for a fresh financial start.
- Protection from creditors: Once you file for Chapter 13 bankruptcy, an automatic stay goes into effect, preventing creditors from taking further collection actions against you.
- Lower interest rates: In some cases, Chapter 13 bankruptcy can lower the interest rates on certain debts like car loans, making them easier to pay.
- Avoiding liquidation: Unlike Chapter 7 bankruptcy, Chapter 13 allows individuals to keep their assets while addressing their debts through a repayment plan.
How to File Bankruptcy Chapter 13
A bankruptcy attorney can assist you with filing for Chapter 13 bankruptcy, which involves several steps. Here is a general overview of Chapter 13 bankruptcy filing:
- Consultation with an Attorney: Schedule a consultation with a bankruptcy attorney to discuss your financial situation and determine if Chapter 13 bankruptcy is the right option for you.
- Credit Counseling: Before filing for bankruptcy, you must complete a credit counseling course from an approved agency within 180 days before filing.
- Gather Financial Documents: Collect all relevant financial documents, including income statements, tax returns, debts, assets, and expenses.
- Complete Required Forms: Fill out the necessary bankruptcy forms, including the petition, schedules, and a proposed repayment plan. These forms can be obtained from the bankruptcy court or your attorney.
- File the Petition: File the completed bankruptcy forms with the bankruptcy court in your jurisdiction. You will also need to pay a filing fee unless you qualify for a fee waiver.
- Automatic Stay: Once the petition is filed, an automatic stay goes into effect, which stops creditors from taking any collection actions against you.
- Meet with Creditors: Attend a meeting of creditors, also known as a 341(a) meeting, where you will be asked questions about your financial situation under oath.
- Confirmation Hearing: A confirmation hearing will be scheduled where the bankruptcy court will review and approve your proposed repayment plan.
- Repayment Plan: Make payments according to the approved repayment plan, typically over a period of three to five years.
- Completion of Plan: Once you have completed all payments under the repayment plan, you may receive a discharge of remaining eligible debts.
What’s the Difference Between Chapter 7 and Chapter 13 Bankruptcy?
U.S. bankruptcy laws recognize two types of bankruptcy filings: Chapter 7 and Chapter 13. Compared with each other, they differ in the following ways:
Chapter 7 Bankruptcy:
- Also known as “liquidation” bankruptcy.
- Involves the sale of non-exempt assets to pay off creditors.
- Typically takes around 3 to 6 months to complete.
- Can discharge most unsecured debts, such as credit card debt and medical bills.
- Income limits apply, and only some qualify for Chapter 7.
Chapter 13 Bankruptcy:
- Also known as “reorganization” bankruptcy.
- Involves creating a repayment plan to pay off creditors over 3 to 5 years.
- Allows individuals to keep their assets and catch up on missed mortgage or car payments.
- Can help prevent foreclosure or repossession.
- There are no income limits, but the individual must have regular income to make payments.
In summary, Chapter 7 involves a swift liquidation of assets to settle debts, while Chapter 13 offers a more gradual approach, allowing individuals to create a repayment plan over time. The choice and eligibility between the two depends on an individual’s financial circumstances and objectives.
What Debts Can Be Included in a Chapter 13 Repayment Plan?
There are various types of debts that can be included in a Chapter 13 bankruptcy repayment plan. The following are examples:
1. Mortgage arrears: Past due payments on your mortgage can be included in the repayment plan to help you catch up and prevent foreclosure.
2. Car loans: If you are behind on car loan payments, you can include the arrears in the plan to prevent repossession.
3. Tax debts: Some types of tax debts, such as income taxes over three years old, can be included in a Chapter 13 plan.
4. Credit card debt: Unsecured debts like credit card balances can be included in the plan and may be paid back in full or in part, depending on your income and expenses.
5. Personal loans: Debts from personal loans can also be included in the repayment plan.
6. Medical bills: Unpaid medical bills can be included in the plan to help manage these debts.
How Long Does Chapter 13 Stay on Credit Report?
A Chapter 13 bankruptcy will remain on your credit report for seven years. While it may negatively impact your credit score during this time, the effect will lessen as time passes, primarily if you work on rebuilding your credit.
Does Chapter 13 Trustee Monitor Income and Bank Accounts?
Yes, in a Chapter 13 bankruptcy case, the trustee assigned is responsible for monitoring the debtor’s income and bank accounts. The trustee will review the debtor’s income and expenses to ensure the proposed repayment plan is feasible and followed. Additionally, the trustee may require the debtor to provide income and bank account statement documentation as part of the monitoring process.
What Happens to Liens in Chapter 13?
In Chapter 13 bankruptcy, most liens on your property are not removed or discharged. However, you can address them through the Chapter 13 repayment plan. The treatment of liens in Chapter 13 will depend on various factors, such as the type of lien and the value of the collateral, allowing for debt cramdown (lower principal).
What Happens When My Chapter 13 Is Paid Off?
When your Chapter 13 bankruptcy is paid off, you will have completed the repayment plan outlined in your bankruptcy case. Here are some common steps that typically occur:
1. Discharge of Debts: Once you have completed all the required payments, any remaining qualifying debts covered by your Chapter 13 plan will be discharged. This means you will no longer be obligated to pay those debts.
2. Court Approval: Your bankruptcy trustee will file a notice with the court indicating that you have completed your payment plan. The court will review the case to ensure all payments were made as required.
3. Case Closure: Once the court approves completing your payment plan, your Chapter 13 bankruptcy case will be closed. This marks the official end of the bankruptcy process.
4. Credit Reporting: The bankruptcy will remain on your credit report for a period, seven years from the filing date for Chapter 13 bankruptcies. However, having completed the payment plan can have a positive impact on your credit score over time.
5. Financial Recovery: With your debts discharged and the bankruptcy process completed, you can rebuild your finances and work towards a more stable financial future.
What Is a Hardship Discharge in Chapter 13?
In a Chapter 13 bankruptcy case, a hardship discharge is a discharge granted by the bankruptcy court when the debtor cannot complete their Chapter 13 repayment plan due to circumstances beyond their control. This discharge may be granted if the debtor experiences a significant financial hardship, such as job loss, disability, or severe illness, that prevents them from making the required plan payments.
To qualify for a hardship discharge, the debtor must have paid a certain percentage of their unsecured debts through the plan or have made payments for a certain period, as specified by the bankruptcy code. Before deciding, the court will review the debtor’s financial situation and the reasons for the requested discharge.
How Many Times Can You File Chapter 13 After Dismissal?
There is no limit on the number of times you can file for Chapter 13 bankruptcy, even after dismissal. You can generally file for a Chapter 13 bankruptcy every 2 years. If the court dismisses your case without prejudice, you can file another case immediately if you still meet the eligibility requirements. However, if the court dismisses your case with prejudice, you may have to wait a set amount of time before filing again, generally between six and 12 months.
Can I Start or Keep a Business While in Chapter 13 Bankruptcy?
Yes, you can keep or start a business while in Chapter 13 bankruptcy, but there are some restrictions. Here are some key points to consider:
1. Approval from the Bankruptcy Trustee: You will need to obtain approval from your bankruptcy trustee before starting or continuing a business. The trustee oversees your repayment plan and must ensure that any business activities will not interfere with your ability to repay your debts.
2. Income Reporting: Any income generated from the business must be reported to the bankruptcy court. This income may impact your repayment plan, so it’s important to be transparent about your earnings.
3. Business Expenses: Be mindful of your business expenses and ensure they are reasonable and necessary. Excessive spending on the business may be viewed unfavorably by the bankruptcy court.
4. Business Structure: The structure of your business (e.g., sole proprietorship, partnership, corporation) may have different implications in bankruptcy. Consult a bankruptcy attorney to understand how your business structure may impact your bankruptcy case.
5. Compliance with Bankruptcy Laws: Make sure to comply with all bankruptcy laws and regulations while operating your business. Any non-compliance could jeopardize your bankruptcy case.
Can IRS Debt Be Discharged in Chapter 13?
Income tax debt owed to the IRS can be included in a Chapter 13 bankruptcy filing and may be discharged under certain conditions. Generally, income tax debt can be discharged in Chapter 13 bankruptcy if it meets specific criteria, such as:
1. The tax debt is for income taxes only and not for other types of taxes like payroll taxes or fraud penalties.
2. The tax return associated with the debt was due at least three years before filing for bankruptcy.
3. The tax return was actually filed at least two years before filing for bankruptcy.
4.The IRS tax assessment is at least 240 days old.
5. The taxpayer did not commit fraud or willful evasion about the tax debt
Can You Keep Your Tax Refund After Filing Chapter 13?
For Chapter 13 bankruptcies, you can generally keep your tax refund if you have enough income to pay the repayment plan in the set timeline.
Can Filing Chapter 13 Stop Eviction?
Yes, when you file for Chapter 13 bankruptcy, an automatic stay is put in place, temporarily halting most collection actions, including eviction proceedings. However, the eviction may proceed if the landlord files a motion with the bankruptcy court to lift the automatic stay or already had a judgment to evict you prior to your filing for Chapter 13 relief.
Can Chapter 13 Stop Foreclosure?
Yes, filing for Chapter 13 bankruptcy can indeed help stop a foreclosure. When you file for Chapter 13 bankruptcy, an automatic stay is put into place, which halts all collection activities, including foreclosure proceedings. This allows you to catch up on missed mortgage payments and potentially save your home. However, it’s important to note that you must continue making your monthly mortgage payments as required by the bankruptcy court during the Chapter 13 repayment plan.
What If I Get an Income Bonus During Chapter 13?
If you receive a bonus during Chapter 13 bankruptcy, you must report any increase in income to your bankruptcy trustee.
They will review the extra income amount and determine if it needs to be included in your repayment plan. If the bonus is substantial, you may be required to increase your monthly payments to creditors. However, if the bonus is necessary for you to cover your living expenses, it may not affect your repayment plan timeline.
Can I Sell My Car While in Chapter 13?
In general, you can’t sell your car during Chapter 13 bankruptcy without the approval of the bankruptcy judge and the trustee.
If the sale is made at a fair market value between independent parties to help you pay the creditors, the court is unlikely to object to you selling your car.
The court doesn’t want people hiding assets by selling them to relatives, so it needs to approve the transfer.
Can You Purchase a House While in Chapter 13?
Yes, it is possible to purchase a house while in Chapter 13 bankruptcy, but several factors must be considered. You will need to obtain permission from your bankruptcy trustee and the bankruptcy court before proceeding with the purchase. Additionally, you will likely face higher interest rates, stricter lending requirements, and limitations on the amount you can borrow in a mortgage.
How Long After Chapter 13 Can I Sell My House?
While your Chapter 13 bankruptcy case is still open, you will need to obtain permission from the bankruptcy court before selling any significant assets, including your house.
Can Utility Bills Be Included in Chapter 13?
Yes, utility bills can be included in a Chapter 13 bankruptcy filing repayment plan. Including utility bills in your repayment plan can help you catch up on past-due amounts and maintain essential services during the bankruptcy case.
What Happens to Student Loans in Chapter 13?
In Chapter 13 bankruptcy, student loans are considered non-dischargeable debts. You will be required to make payments to your bankruptcy trustee, who will send a portion of the money to lenders who gave you the student loans.
Still, a Chapter 13 bankruptcy can provide some relief by allowing you to restructure your debts and create a repayment plan that fits your financial situation, making the student loan payments more manageable.
Can You Get a Loan While in Chapter 13?
No, you cannot borrow money or use any other type of credit during Chapter 13 without the bankruptcy judge or the Chapter 13 trustee not giving you written permission.
The only time borrowing without prior authorization is allowed is in an emergency where the loan is necessary to save someone’s life, health, or property.
