You are researching whether to file bankruptcy, and may be realizing that the two main types of consumer bankruptcy are Chapter 7 and Chapter 13.
The purpose of this article is to tell you the important things about Chapter 13 bankruptcy in simple turns. The goal is to be most informed whether that's seeing tips or tricks or reading horror stories.
The two components that are essential are:
- How Much Chapter 13 Bankruptcy Costs
- How Chapter 13 Bankruptcy Works
- Estimating Your Chapter 13 Bankruptcy Repayment Plan
- The Chapter 13 Bankruptcy Confirmation Hearing
- The Chapter 13 Bankruptcy Discharge
- Chapter 13 Bankruptcy Pros and Cons
- Chapter 13 Bankruptcy Alternatives
Chapter 13 bankruptcy is known as the wage earners bankruptcy. It offers debt adjustments to those who have regular incomes in the form of a Chapter 13 repayment plan. Many individuals consider Chapter 13 bankruptcy when they do not qualify or are at risk of losing their belongings in a Chapter 7 bankruptcy.
How Much Chapter 13 Bankruptcy Costs
You also have to pay a filing fee of $235 for the case filing and $75 for an administrative fee.
Due to the complexity of Chapter 13 bankruptcy, many people also hire a bankruptcy attorney for their Chapter 13 bankruptcy filing. Most Chapter 13 bankruptcy attorneys charge the same fee in the district in what’s referred to as the no look fee. The no look fee is the presumptively reasonable fee that a Chapter 13 bankruptcy attorney can charge the debtor through the plan.
The Chapter 13 Bankruptcy fee often costs between $2500 and $6000. The cost is often higher than a Chapter 7 bankruptcy because of the complexity and length of the case.
You will also be responsible for the Chapter 13 trustee administrative fee that can range depending on your district.
Due to the high cost of the Chapter 13 bankruptcy attorney and trustee fee, many people wonder whether the Chapter 13 bankruptcy is a good idea.
Next, let’s cover just how Chapter 13 bankruptcy works.
How Chapter 13 Bankruptcy Works
The goal of a Chapter 13 bankruptcy is a bankruptcy discharge, which essentially means a forgiveness of your debt.
An individual starts the Chapter 13 bankruptcy by filing a petition with the local bankruptcy court. You would need to provide your financial details, including your income, expenses, assets, and liabilities, and tax return transcripts.
In a Chapter 13 bankruptcy, you have to take 2 mandatory courses: A credit counseling and a debtor education course.
A Chapter 13 bankruptcy plan often lasts 3 or 5 years. You will have a monthly plan payment that you will be paying often through the Chapter 13 Bankruptcy Trustee, the administrator and overseer of the bankruptcy. To succeed, you also may want to consider reading tips and tricks to help you along thew ay.
You may know that not everyone qualifies for Chapter 7 bankruptcy, but does everyone qualify for a Chapter 13 bankruptcy? As long as you are under the debt limit, you should qualify for the Chapter 13 bankruptcy.
You may be wondering how does a Chapter 13 work or how to file a Chapter 13 bankruptcy. Let's dig into the details. The first step is to file at a bankruptcy court in the debtor’s area of stay. Apart from any exceptions, the debtor will be required to avail the following information to the court when filing according to Fed. R. Bankr. P. 1007(b)” (US Courts):
- Schedules of assets and liabilities
- Details of current earnings and expenses
- Schedule of executor contracts and unexpired leases
- A statement of their financial situation
Also, the debtor should file evidence of credit counseling, plus a copy of any debt repayment arrangement that was agreed on, evidence of payment from the employer if received within two months before filing. Other requirements include a statement of monthly earnings, consisting of any expected rise in income or expenses, and details of the debtor's interest in state or federal tuition or education accounts if any.
The debtor must present copies of tax returns of their most recent tax year, plus a copy of all returns made in the bankruptcy period. Married couples can file individual or joint petitions.
Upon filing, the debtor has to remit a $75 administrative fee and a $235 filing fee to the court clerk. The good news is that with the court's permission, the debtor can pay the costs in up to four installments to be paid within four months of filing.
The court can extend this 4-month duration if the debtor makes the payment before the six months have passed. Keep in mind that for a joint petition, the fee will be paid only once. If there is a default in payment, then the case might be dismissed.
Information Needed for Official Bankruptcy Forms
From information from the US Courts, to be considered fully compliant with the Official Bankruptcy Forms requirements, the debtor should avail the information below:
- The names of all the creditors, plus the nature and amount of their claims;
- The origin of the debtor’s earnings, plus the amount and regularity;
- A catalogue of the debtor’s assets, plus
- A comprehensive record of the debtor's monthly living expenditure, including, medicine, shelter, food, taxes, transportation, utilities, and clothing.
As far as married couples are concerned, the debtor filing should provide the spouse’s details irrespective of whether the other party is filing or it is a joint petition. Why is this important? Well, the courts will use the information to establish the financial situation of the house.
After the debtor has filed for Chapter 13, they are allocated an unbiased trustee to administer the bankruptcy case. Part of the trustee's responsibilities would be to collect the payments from the debtor and forward to the creditor, in addition to evaluating the situation.
By filing, this will put a stop to the majority of collectors for the individual and their assets. Still, there are exceptional cases where this hold doesn't apply, and it might be operative for a short duration.
Now, when the hold is in position, the creditors don’t have the power to launch lawsuits, call the debtor, or ask for payments. The bankruptcy clerk will ensure that all the creditors whose names were in the list when filing are notified. Also, Chapter 13 puts a halt to any creditors who might want to collect consumer debts from ‘co-debtors.’ These refer to debts that accrued from personal loans or household loans.
An automatic stay also protects your home. As a matter of fact, the instant you file, an automatic stay comes into effect to halt every foreclosure exercise. Payments that were overdue until that moment can be brought back over a suitable duration.
Nonetheless, there are some situations where foreclosure can still take place, including:
- In case the mortgage provider concludes the foreclosure sale before the debtor filed the petition.
- In the event the debtor defaults on the mortgage payments after filing.
The Creditors' Meeting
Within 21 to 50 days after the debtor files for bankruptcy, the trustee will call a creditor’s meeting. The court will place you under oath at this hearing. Then, the debtor and creditor can now direct questions at each other.
According to the US Courts, the debtor needs to be at this meeting and answer questions from the creditor regarding the debtor's financial situation and the proposed details of the payment arrangement. If a married couple filed a joint petition, then it is a must for both of them to be present at the meeting.
So that they can be impartial in judgment, bankruptcy judges cannot be present at these meetings. All arising problems are solved in or after the session, and if the plan and the petition are well-structured, then things will move effortlessly with the input of the trustee, of course.
In a Chapter 13 scenario, unsecured creditors are allowed to file their claims inside of 90 days from the initial meeting with creditors. For a governmental section, 180 days is the stipulated time. After the sit-down with the creditors, the creditors, the debtor, and the trustee can attend court for a hearing concerning the debtor’s repayment arrangement.
The Chapter 13 Bankruptcy Repayment Plan
Apart from the exceptions made at court, a motion of the repayment arrangement is needed when filing a petition or inside of two weeks of filing. This arrangement must be presented to the court for approval and should consist of a proposal of remitting payments to the trustee in twice-a-week or monthly installments.
Once the court approves the plan, you will start making payments to your bankruptcy trustee. The trustee will then take your payments and distribute them between your creditors.
The US Courts state that there are three types of claims:
- ·Priority- Claims made ‘unique’ by bankruptcy law, including the majority of taxes and the bankruptcy exercise costs.
- Secured- Claims where the creditor has the freedom to confiscate some assets from the debtor if no payments are forthcoming.
- Unsecured- Debts without any collateral backing it.
Creditors have the option to file a motion to force you to repay the full amount.
In Chapter 13 bankruptcy, disposable earnings are earnings exclusive of the debtor’s basic requirements. The debtor’s monthly earnings determine the ‘applicable commitment duration.’
Estimating Your Chapter 13 Plan Payment
The Chapter 13 Payment Plan often consists of the following:
- Payment to bankruptcy attorney
- Payment to Chapter 13 trustee
- Payment to secured creditors
- Payment to other obligations
- Payment to unsecured creditors
You can get an estimate of your Chapter 13 plan payment by taking a Chapter 13 payment plan calculator online.
The Chapter 13 Bankruptcy Confirmation Hearing
The court will schedule a confirmation hearing that confirms your repayment plan. The court will send your creditors a 28-day notice. They are able to attend your court hearing and object to the proposed payment plan.
What are the most usual reasons for objection?
- Creditors get less than planned or what they could get with a Chapter 7 liquidation.
- The arrangement doesn't entirely allocate the debtor's disposable earnings throughout the repayment time.
The moment the court confirms the plan, the Chapter 13 trustee can begin to distribute the funds to the creditors. An individual can still convert to a Chapter 7 case if denied.
If the case is denied in full, the court will refund any payments you've made, minus any administrative fees.
In some cases, there might be reasons that might make the debtor unable to honor payments under the arrangement. Such an occurrence might stem from the debtor’s neglect of presenting a complete creditor’s list or the creditor objecting to the plan. If this is the case, you can alter your arrangement before filing. An unsecured creditor, trustee, or individual can all appeal for the modification of your repayment plan.
How to Make the Plan a Reality
A confirmed repayment arrangement is binding to both the creditors and the debtors. The moment the court accepts the proposal, it falls upon the debtor to ensure its success.
The debtors will be responsible for remitting money directly via the payroll deduction or to the trustee. It is essential that the debtors stay away from new debts because it could affect their ability to honor the payments religiously. Paying through payroll deductions is an ideal method of ensuring the debtors don’t default on p payments.
Keep in mind that when payments are late, the case might face liquidation through Chapter 7 bankruptcy or face dismissal. The court may dismiss the case if the debtor doesn't remit any domestic support monies or other needed tax amounts.
The Chapter 13 Bankruptcy Discharge
The range or extent of Chapter 13 Discharge has in recent times got some modifications, so it is advisable to seek legal advice about discharge prior to filing.
Under the Chapter 13 arrangement, a debtor will get a discharge after concluding their entire payments. A discharge of debt does not remove things like domestic support payments. Lastly, the debtor should have fulfilled the requirements of a financial management course.
The court will not make the discharge official until it is sure that after the notice and hearing, there are no possible processes that could restrict the debtor’s household exemption.
After a discharge, creditors who have had their claims honored partially or fully are not allowed to collect from the debt or take legal action against the debtor.
Usually, Chapter 13 discharges most secured debts. However, this isn't true for all debts. Some of these exceptions include debts for child support, home mortgage, particular taxes, or federal educational loans. Debtors may still be responsible for taxes and other debts. Chapter 13 discharges remove more debt than Chapter 7.
Chapter 13 Bankruptcy Pros and Cons
You may want to consider the pros and cons of Chapter 13 bankruptcy before filing. Let’s cover them one by one.
- Many people see that protecting their home from foreclosure is an advantage of Chapter 13 bankruptcy. You get the guarantee of not losing your home from being auctioned off, and you can often catch up on payments in arrears in the payment plan.
- You can readjust your debt. In many Chapter 13 bankruptcy plans, you do not have to pay back 100% to your unsecured creditors.
- You have a fixed duration of repayment. You often have a 3 or 5 year plan unless you are in a 100% Chapter 13 plan.
- You could have lower payments than your current monthly obligations. Your Chapter 13 plan payment may be considerably lower than what you are currently paying towards your debt
- Potentially a lower vehicle interest rate or balance on your car note.
- Protection against your creditors. This can be from collection calls and from unpaid debt lawsuits.
- Chapter 13 bankruptcy also consolidates debt into one single payment handled by the Chapter 13 trustee.
- Chapter 13 bankruptcy can negatively affect your credit report and credit score. For example, a Chapter 13 bankruptcy is on your credit report for 7 years. This can create a waiting period for purchasing a new home.
- The plan takes 3 or 5 years until you get discharged from debt, often much longer than Chapter 7 bankruptcy which can take 120 days.
- There may be implications on your Chapter 13 plan if you receive an increase in your salary or additional sums of money.
- Chapter 13 bankruptcy can be very expensive if you are in a 100% Chapter 13 bankruptcy plan because you are essentially paying back your creditors 100% in addition to bankruptcy attorney and Chapter 13 bankruptcy trustee fees.
Chapter 13 Bankruptcy Alternatives
You should also consider your Chapter 13 bankruptcy alternatives. You can check whether you qualify for Chapter 7 bankruptcy, but many individuals who are looking to file Chapter 13 bankruptcy make too much or have an asset above the bankruptcy exemption that prevents them from wanting to pursue that route.
Debt settlement is one of the most common alternatives to Chapter 13 bankruptcy. The reason that many people compare debt settlement to Chapter 13 bankruptcy is as follows:
- Both Chapter 13 bankruptcy and debt settlement is payment plan solutions
- Debt settlement is often less expensive that debt management
- Debt settlement is often more flexible than Chapter 13 bankruptcy, making it sometimes more attractive to those who have variable incomes.
- Chapter 13 bankruptcy protects your from creditor lawsuits. Debt settlement does not protect you in that way.
Before doing debt settlement, you may want to consider the lawsuit likelihood of creditors and also the potential tax implications of forgiven debt. You may not be responsible for taxes if you are tax insolvent, but it’s important to understand these attributes.
You may also want to consider reading the FTC report on debt settlement.
Debt management, also known as credit counseling, is another common alternative to Chapter 13 bankruptcy. In a debt management program, the company would attempt to negotiate the interest rate of the debt lower, making the monthly payments more affordable.
Also, consider reading this report from the CFPB on debt settlement and credit counseling.
What Should You Do?
There is a high rate of Chapter 13 dismissals, so it is important to consider whether you can afford Chapter 13 bankruptcy, your estimated cost of Chapter 13 bankruptcy, the pros and cons and the alternatives.
Hopefully this article helped put complex Chapter 13 bankruptcy terms into simple understandable terms. Reach out to me directly at firstname.lastname@example.org if you have any further questions.