Chapter 13 Bankruptcy Basics
There are several Bankruptcy codes and plans created to provide the assistance to the debtors to pay their credits. This code is classified into different chapters but the individual debtors are allowed to file only four Bankruptcy plans that are:
- Chapter 7: this plan is adopted by a large number of people as it reduces the debtor’s burden by forgiving their debts and allowing them to repay their creditor using the non-essential assets like household products, furniture, and etc.
- Chapter 11: this plan is effective for huge debts
- Chapter 12: this plan basically focuses on the small farmer’s interest, fishermen, and other such labors.
- Chapter 13: the chapter 13 bankruptcy plan involves the monthly payment by the debtors to a trustee and the plan gets concluded after the successful discharge of the debts.
Introduction to chapter 13 bankruptcy
The chapter 13 bankruptcy is the popular payment plan for individual debtors after chapter 7. The main concern of this plan is to rearrange funds for the debtors rather than discarding the debts. The case is filed by the debtor against the creditor’s claim of repayment of funds. The plan follows the procedure of monthly payment by the debtor to the trustee which long last for 36-60 months. In the end, the trustee pays the entire received amount to the debtor’s creditor.
After the discharge of debts, the debtor is no more liable to pay a certain sum of money to its creditor and hence gets free from the debts. However, in chapter 7 Bankruptcy plan is the debtor is not required to pay funds to his creditors instead he has to use the nonessential assets for the same.
In order to file the chapter 13 Bankruptcy case, the debtor is required to submit his schedules of assets and liabilities, the schedule of his income and expenses, a statement of his financial affairs, and a schedule of his leases. The debtor has to submit the documents regarding the tax return statement and details to the trustee. The United States’ court charges a fee of $235 for filing the case as well as $75 as a nominal fee for miscellaneous expenses. The fees can be paid in installments or in a lump sum. But the failure of the payment can lead to the removal of the case. The case is approved after the submission of documents including:
- The number of creditors and the amount claimed by them
- Debtor’s source of monthly income
- A list of the debtor’s property, assets, and liabilities
- Debtor’s monthly expenditure (food, clothes, transportation, medicine, taxes, and shelter expenses)
After the approval of Debtor’s case, a trustee is appointed to the debtors. This trustee assists the debtors by collecting a monthly payment from the debtor and discharging the same to the creditors.
Who is eligible to file chapter 13 bankruptcy?
There are several restrictions and rules to file the chapter 13 bankruptcy. An individual or a couple is eligible to file the case. However, a business enterprise (sole proprietorship, partnership, or company) are not allowed to do so. If they require arranging funds to repay their debts then they can opt for the chapter 11 bankruptcy plan. Although a business cannot file chapter 13, a sole proprietor can file a case without involving the name of his business. Stockbrokers and commodity brokers are highly restricted to follow this plan.
The judge analyzes your source of income and expenses. Your case approves only if you are having enough income and salary to repay the whole debt. Also, your source of income to use the chapter 13 plan has to be:
- Salary or wages from seasonal work
- Income generated from self-employment
- Pension payments
- Social security advantages
- Commission from sale
- Welfare payments
- Rents and royalties
- Unemployment benefits or child support you get
- Income generated from property business.
If you are income source does not follow any of the above-stated sources then your case cannot be filed in the court.
Another factor states that your debts (secured debts) should not be very high and exceed the limit of $1,184,200. Similarly, the number of unsecured debts should not exceed $394,725 to file the same.
Chapter 13 Repayment Plan
The main part of your case is your repayment plan which describes your payment mode, procedure, and source. Generally, the debtor has two options of either selecting the local court form or the official form. The court approves your plan only if your trustee and the court are satisfied. Once your payment plan is approved, you have to start paying your trustee after one month of filing the case.
You are required to pay the priority debts, secured debts, unsecured debts, and the value of the nonexempt property. The length of the repayment plan of a debtor is decided by his income level. For instance, if the income level is more than that of a median income then the five-year plan is the best choice for you. However, if it is lower than that of a median income then you must opt for the year plan.
How much do I have to pay my creditors back?
The percent of repayment varies in different cases. Some creditors desire to get the 100 percent payment whereas others offer much less. Apart from the creditor’s payment, a debtor has to pay the administrative fees (can be paid in installments) which include the filing fee, the trustee’s commission (usually ranges between 3% to 10%), and the attorney’s fee if you have hired. The debtors have to pay 100 percent of priority debts consisting of child support, income tax, and wage/salaries/commission which you are liable to pay to your workers. Other payments include mortgage defaults to 100 percent, secured debts default to 100 percent, and unsecured debts have to be paid as per your liability.
How long will my payment plan last?
Although the repayment plan in chapter 13 bankruptcy lasts for 3 to 5 years, it is dependent on the monthly income and the time you require to clear your debts. Generally, the income of a debtor is compared with the median income and then a repayment plan is selected. A long-term chapter 13 plan requires less monthly payment whereas that of a short-term plan requires high monthly payment to the trustee.
Although the chapter 13 bankruptcy plan is of 3 to 5 years, debtors having high-income source can apply for a short time plan. However, the debtor must provide the documentation for the same.
What happens if I can’t make my plan payments?
Some people undergo several financial hurdles due to which they are unable to pay their creditors and trustee. In this case, the trustee usually requests for dismissal of the case in court. However, there are various options to execute if you fail to make the payment. This includes:
- Get current on your payments
- Modify your payment plan by introducing new plan with proper documentation to the court
- Request a hardship discharge
- Convert you plan to chapter 7 but you will be required to provide the nonessential assets to the trustee
- Dismiss the case and file it again
The benefit of filing a chapter 13 bankruptcy
The chapter 13 bankruptcy plan has proven to be very beneficial in aiding the debtors to repay their debts. The major advantages chapter 13 bankruptcy plan offers are:
- It can defend a home from foreclosure or repossession
- It can remove the requirement for the second mortgage
- Chapter 13 can safeguard your assets and vehicles from foreclosure
- It defends a co-signer or guarantor
- It permits the tax debt to be paid over a time
- It protects the debtors who are unable to file the chapter 7 plan
- It minimizes the credit damage
- Unlike the chapter 7, it safeguards your nonessential properties
- You can keep your option open following the plan
- It can be used to get back the driver’s license
Rebuilding after chapter 13 Bankruptcy
As per the fair credit reporting act, the bankruptcy has the impact on your credit for a time period of 10 years. However, this is not the case with chapter 13. If you follow the chapter 13 plan then the bankruptcy affects your credit for maximum 7 years from the date of filing the case. If due to an urgent requirement you need a loan before the completion of 5 years then you have to take the permission from the court. However, once the bankruptcy time is finished, you can make a new credit with no requirement of permission from the court.
To rebuild your credit the basic step is to examine the credit report. If you find any errors then contact the credit agency and clear it. When you apply for a new debit card make sure that it should be a secured debit card. Also, open a current account and make a monthly payment to avoid high incurring interest.