Chapter 13

Chapter 13 bankruptcy is entirely different from its Chapter 7 counterpart. It involves a reorganization of the financial affairs of the debtor. Hence, it is sometimes referred to as reorganizational bankruptcy. The main objective is to come up with a payment plan that will benefit the creditors, while concurrently protecting the debtor from consequences such as foreclosure, garnishment, levy, among others.

In a Chapter 7 bankruptcy, a debtor is given a fresh start by discharging most of the debts incurred. However, those who don’t qualify for Chapter 7 may seek financial relief from Chapter 13 bankruptcy filing. In such case, the debtor does not hand over any property, but repays some or all of the debt using his/her income over a three to five year repayment plan. In most cases, the repayment or restructuring plan provides debtors with more flexible terms like lower interest. Since debt restructuring involves repayment instead of debt discharge, debtors who opt for Chapter 13 should have a regular source of income. Debtors must also work closely with their attorney to find out how much of their income can be used for repaying their debt.

The length of the repayment plan depends largely on the debtor’s income level. If your average monthly income is more than the median monthly income for your state, you will be mandated to propose a five-year repayment plan. On the other hand, if your income is less than the median, you may put forward a three-year plan. For information about the median income in your state, go to the website of the United States Trustee’s website. Note that regardless of how much you earn, your plan will end the moment you fully repay all of your debts, even if you haven’t reached the third or fifth year mark.

Evidently, Chapter 13 bankruptcy is not for everyone. You will be required to prove to the court that you have enough disposable income to meet your repayment obligations. If you don’t have regular income or if it is too low, the bankruptcy court may not allow you to file for Chapter 13. Likewise, your total debt must not be too high. You won’t qualify for Chapter 13 bankruptcy if your secured debts exceed $1,010,650. In addition, your unsecured debts must not be more than $336,900. A debt is secured if it gives a creditor the right to take a specific item of property if you fail to issue the necessary payments. Car and home loans are the most common examples of secured debts. An unsecured debt does not empower the creditor to take specific properties. Most debts are unsecured, including medical bills, legal bills, credit card debts, department store charges and back utility bills.

Chapter 13 Repayment Plan

The Chapter 13 repayment plan forms the core of the Chapter 13 bankruptcy case. The plan provides some sort of blueprint that indicates how long the plan will last; how much each creditor will be paid, the values of the debtor’s properties, etc. The repayment plan must be approved and confirmed by the bankruptcy court before the case can proceed. The trustee and creditors can raise objections to different aspects of the plan. There is no official form for the plan so it is highly recommended that you seek the expert advice of one of our bankruptcy attorneys when preparing your repayment plan documents.

A Chapter 13 plan is required to show the court that you can pay certain debts in full. Such debts are known as “priority debts,” since they are deemed important in order to move to the head of the bankruptcy repayment line. Examples of priority debt include child/spousal support, alimony, criminal fines/restitution, wage claims of employees and certain tax obligations. In addition, your repayment plan must include your regular payments on secured debts and repayment of any arrearages on the debts.
The repayment plan must also show that any disposable income left after issuing the required payments will be allotted for repaying any unsecured debts. It is important to note that you won’t be required to repay these debts in full or at all in some cases.

What Happens if I Fail to Complete the Repayment Plan?

For over a decade, roughly two-thirds of all Chapter 13 repayment plans failed before the debtor completes the scheduled payments, and even before unsecured creditors received any payment at all. Non completion can have various causes. Debtors may experience repeated financial troubles or face new crises.

Regardless of the reason, if you cannot complete a Chapter 13 repayment plan, the bankruptcy trustee has the authority to modify the plan, or the remaining debts may be discharged in full if the debtor can illustrate to the court that “financial hardship” does exist. In case the bankruptcy court won’t allow you to modify your repayment plan or give you a hardship discharge, you have two choices to consider: Convert to a Chapter 7 bankruptcy or request the court to dismiss your Chapter 13 case. Either way, you will still owe any remaining debts, on top of the interest(s) that creditors charged while the case was pending.

If you want to find out if you qualify for Chapter 13 relief, start by filing out our bankruptcy case review form and one of our attorneys will follow up on your eligibility within 24 hours.