Chapter 13

In a Chapter 13, debtors pay back all or a portion of their debt over a three-to-five year period. In order to qualify for Chapter 13, you must have enough disposable income to pay back at least a portion of your debt, and your debt must be within certain limits. Thus, Chapter 13 bankruptcy is also known as “wage earner’s bankruptcy.”

Common reasons for filing Chapter 13 include: 

• saving your home from foreclosure by paying arrears
• having income that disqualifies one from filing Chapter 7
• having non-exempt assets, like equity in a home, that one wishes to protect from liquidation
• having tax debt one would prefer to pay off over time
• having a co-debtor who would be negatively impacted if one decided to file Chapter 7.

How Chapter 13 Works

As with Chapter 7, a debtor must receive credit counseling from an approved agency prior to filing, and certain forms (“schedules”) must then be filed with the U.S. Bankruptcy Court giving information about assets, debts, income and expenses. A bankruptcy trustee is assigned to the case, and there is a Section 341 Meeting, also known as the First Meeting of Creditors.

Unlike with Chapter 7, the meeting of creditors is not the last hearing the debtor must attend. The central feature of a Chapter 13 bankruptcy is the Chapter 13 Plan, which is simply a plan describing how the debtor intends to repay their debts. This plan must be confirmed before the assigned bankruptcy judge.

Some debts, like child support, are “priority debts” and must be paid in full; others may be paid at a very low percentage of what is actually owed. Mortgage and vehicle payments must be kept current.

Mortgage arrears may be be brought current and Debtors can save their home.  Because the plan period lasts three to five years, it is likely that the debtor’s circumstances will change. The debtor may need to request modifications of the plan if the original plan is no longer feasible.  If the court declines to modify the plan, the case may be converted to a Chapter 7 if it qualifies.

At the conclusion of the plan period, if the debtor demonstrates he is current on certain obligations, and has completed a debtor education course, the remainder of his debt is erased.

Advantages of Chapter 13

• Filing Chapter 13  bankruptcy can halt a foreclosure and protect a home with equity that would be nonexempt under a Chapter 7.
• Chapter 13 can protect co-signers who are jointly liable with the debtor on consumer debts.
• Chapter 13 essentially consolidates debts; the debtor makes monthly payments to the trustee, who then makes payments to creditors.
• Chapter 13 can lower payments on some secured debt (mortgages are excluded) by extending the payments over the life of the plan.

If you would like to learn more about Chapter 13 bankruptcy and other debt resolution options, we invite you to contact our firm.