What is Chapter 13 Bankruptcy?
Many people think of bankruptcy court as the final stop on a path to financial ruin, the only option left when repaying debts seems impossible. But there’s hope even in bankruptcy, and Chapter 13 of the federal bankruptcy code offers the closest thing to a soft landing.
Sometimes called the Wage Earner’s Bankruptcy, Chapter 13 allows those with enough income to repay all or part of their debts an alternative to liquidation. It’s bankruptcy for those whose biggest problem is dealing with creditors’ demands for immediate payment, not lack of income.
One of Chapter 13’s most attractive features is the chance is the ability to pay back past due mortgage payments over a 3 to 5 year period and you can keep your home as long as you remain current on your mortgage payments under the Chapter 13 Plan.
Under Chapter 13, people have three to five years to resolve their debts while applying at least 90% of their disposable income to pay their unsecured creditors. The option allows debtors to eliminate unsecured debts while catching up on missed mortgage payments and/or vehicle payments. Short-circuiting home foreclosure is one of the option’s most attractive features. Additionally, the Bankruptcy Courts in the Southern District and Middle District of Florida have mortgage modification mediation programs which allows debtors to obtain loan modifications
How Chapter 13 Works
Chapter 13 bankruptcy is like Chapter 11, which applies to businesses. In both cases, the petitioner submits a reorganization plan that safeguards assets against repossession or foreclosure and typically requests forgiveness of other debts. They both differ from the more extreme Chapter 7 Bankruptcy which liquidates all assets except those specifically protected.
No bankruptcy filing eliminates all debts. Child support and alimony payments aren’t dischargeable, nor are student loans and most unpaid taxes. But bankruptcy can clear away many other debts, though it will likely make it harder for the debtor to borrow in the future.
To be eligible to file for Chapter 13 bankruptcy, an individual must have no more than $394,725 in unsecured debt, such as credit card bills or personal loans. They also can have no more than $1,184,200 in secured debts, which includes mortgages and car loans. These figures adjust periodically to reflect changes in the consumer price index.
One of Chapter 13 allows you to stop an effort to foreclose on your home. Filing a Chapter 13 petition suspends any current foreclosure proceedings, vehicle repossessions or any other pending collection lawsuits and payment of any other debts owed. Additionally, any wage garnishments are also ceased when bankruptcy is filed. This buys time while the court considers the plan, but it does not eliminate the debt. Hopefully, the bankruptcy plan will free enough of your income that you’ll be able to make regular mortgage payments and keep your house.
The Chapter 13 Process
First, you should find a bankruptcy attorney experienced in Chapter 13 Bankruptcy as the process is very challenging for those without experience in the process. We provide free evaluation evaluations and estimate to file.
To file Chapter 13 Bankruptcy, you will need to provide:
- A list of creditors and the amount of their claims
- Disclosure of the amount and sources of the debtor’s income
- A list of the debtor’s property, as well as an accounting of all contracts and leases in the debtor’s name
- A breakdown of the debtor’s monthly living expenses
- Tax information, including a copy of the debtor’s most recent federal tax return and a statement of any unpaid taxes.
Chapter 13 petitioners must stipulate that they haven’t had a bankruptcy petition dismissed in the 180 days before filing due to their unwillingness to appear in court. Also, anyone seeking bankruptcy protection, must undergo credit counseling from an approved agency within 180 days of filing a petition.
Shortly after filing, the debtor also must propose a repayment plan. A bankruptcy judge or administrator will hold a hearing to determine whether the plan meets the requirements of the bankruptcy code and is fair. Creditors may raise objections to the plan, but the court has the final say.
Debtors can arrange to make up delinquent payments over time, but under Chapter 13 rules, all new mortgage payments from the time of filing must be made on time.
The debtor also must work with the Chapter 13 Trustee, who distributes payments to the creditors. The debtor is not required to have any direct contact with his or her creditors under Chapter 13. In fact, all creditors are required by law to cease any attempts to recover the debts covered under the Chapter 13 process if all terms of the agreement are being met.
You must stick to the basics of your settlement. No late payments are permitted. You’ll be allowed to accelerate your payments, allowing you to seek an early discharge from the agreement. Conversely, if your financial situation worsens, it’s up to you to inform the bankruptcy trustee and seek a modification of the plan, if necessary. Failure to comply with the terms, especially failure to make payments on time, could result in you case being dismissed.