What Is Chapter 13 Bankruptcy?
A person filing for bankruptcy under Chapter 13 is seeking the opportunity to repay some of, or all, their outstanding debts, sometimes at a lower or no interest rate. Since the Chapter 13 process allows the debtor to use future income to repay creditors, filing Chapter 13 bankruptcy is an option for debtors who have a regular income and can make regular payments on the amount owed. Under Chapter 13 of the United States Bankruptcy Code, a debtor has five years in which creditors must be repaid. In a Chapter 13 bankruptcy, a debtor is allowed to keep all his or her property while creditor payments are made under the terms of the court approved repayment plan. In preparing a plan, the court will work with all parties to establish details of repayment terms, including the amount of the payments and the dates they will be made. By law, the repayment must begin within thirty days after the filing. Debtors make their payments to the Chapter 13 Trustee after which the Trustee will make payments to their creditors. There are several advantages to Chapter 13 over a Chapter 7. A Chapter 13 allows a debtor to cure arrears which he owes on his mortgage and auto loan, preventing the possibility of a foreclosure or repossession. In addition, a Chapter 13 allows a debtor to pay off secured debts such as an auto loan at a reduced amount, or non-dischargeable debts such as tax debts or arrears owed on domestic support obligations (ie. Child support, spousal support). Although Chapter 13 Bankruptcy is a good option for some debtors, the most important criteria for a person to be eligible to file a Chapter 13 Bankruptcy is that their ability to maintain a regular income.
How Does Chapter 13 Bankruptcy Work?
In a Chapter 13 bankruptcy a debtor is allowed to keep all his or her property while the court approves a new reduced, or interest-free, repayment plan. Working with all parties, debtor’s counsel prepares a written plan which details the terms of repayment, including the amount of the payments and the date(s) they are to be made. The plan must be approved by the Trustee and Court before taking effect. The repayment must begin within thirty days following the opening of the case. The debtor will start making direct payments to the Trustee. However, the Chapter 13 will eventually require payments through a wage withholding unless special circumstances exist. As the Debtor makes payments to the Chapter 13 Trustee, the Trustee will in turn make payments to the creditors. Creditors are paid by the Trustee in order of priority. Secured debts such as a mortgage and auto loan payments are paid first. Then, mortgage arrears and priority debts such as tax debt and domestic support arrears are paid. Unsecured creditors are “last in line” for payment. The Trustee will pay a percentage of the total amount of unsecured debt as prescribed in the confirmed plan (the plan approved by the court). Once a debtor completes the terms of the Chapter 13 plan, the remainder of unsecured debt is discharged.
Who Can File For Chapter 13 Bankruptcy?
Although Chapter 13 Bankruptcy is a good option for some debtors, it is not available to everyone. The most important criteria for a person to be eligible to file for Chapter 13 Bankruptcy is the ability to maintain adequate income for the payment into their Chapter 13 plan.
Businesses Can’t File for Chapter 13 Bankruptcy
Businesses, even sole proprietorships, are not eligible to file for Chapter 13 bankruptcy in the name of the business (they are diverted to Chapter 11 bankruptcy) when in need of help reorganizing their debts. A business owner, however, can file for Chapter 13 bankruptcy as an individual and can include in the Chapter 13 bankruptcy case business-related debts for which he/she is personally liable. However, there is one exception to this rule; Stockbrokers and commodity brokers may not file a Chapter 13 bankruptcy case, even if they want to discharge only personal or non-business debts.
You must have sufficient disposable income
In order to qualify for Chapter 13 bankruptcy, you will have to show the bankruptcy court that you will have enough income, after subtracting certain allowed expenses and required payments on secured debts (such as a car loan or mortgage), to meet your repayment obligations. Your plan must pay back certain debts in full, or the judge will not approve it. Federal bankruptcy laws detail sources from which a Chapter 13 plan may be funded; these include:
- Regular wages
- Income received from self-employment
- Wages earned from seasonal work
- Commissions from sales
- Pension payments
- Federal Social Security benefits
- Disability or workers’ compensation benefits
- Unemployment benefits
- Public welfare payments
- Child support or alimony
- Royalty payments, and
- Proceeds from the sale of property
If the debtor is a non-working spouse he/she can file alone and use funds from their working spouse as a source of income. Additionally, an unemployed spouse may file jointly with a working spouse.
Debt Limits
Person with secured debts exceeding approximately $1,010,650 are not eligible to file Chapter 13 bankruptcy. Secured debt also includes those items a person will lose if payments to the creditor are not made; this includes mortgages and car loans. A debt might also be secured if a creditor has filed a lien against the property for a debtor’s failure to pay a debt. In general, the creditor must have only a legal right to a claim in the actual item. In addition to the limit on secured debts, those with unsecured debts exceeding $336,900 may not file for Chapter 13. An “unsecured debt” is one in which a creditor has no legal right to a claim in a particular piece of property. A majority of debts are unsecured and include credit card debts, medical and legal bills and unpaid utility bills.
Debtor Must Be Current on Income Tax Filings
To file for Chapter 13, a debtor must show that he or she has filed both federal and state income tax returns during the three years prior to the bankruptcy filing date. The court may postpone bankruptcy proceedings to allow additional time for the debtor to become current on tax filings. However, the court will dismiss the case if the returns, or proof of the returns, are unable to be produced.
How Can Luftman, Heck & Associates Help You File For Chapter 13 Bankruptcy?
The attorneys at Luftman, Heck & Associates will assist you in understanding the entire bankruptcy process, from evaluating the options that will work best for you to negotiating the terms of the payment plan to appearing in court on your behalf; most importantly, we will work as your advocate in bankruptcy court to ensure your interests and rights are protected. Remember, the creditors have legal representation on their side to support their interests. In general, if you decide that filing Chapter 13 Bankruptcy is the best option for you, our attorney’s will help you:
- Prepare a reasonable budget based on your income and ability to make payments
- Develop a process to communicate with secured creditors
- Prepare a Chapter 13 plan
- File the appropriate forms and pleadings
- Provide representation at any required meetings or court hearings
- Request a discharge once all payments under the plan are complete
The Law Firm of Luftman, Heck & Associates, LLP is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code. The information provided on the web site is not, nor is it intended to be, legal advice or an offer to represent you.
