Chapter 13 bankruptcy is basically a “repayment plan” for a portion of debt. In Chapter 13 bankruptcy debtors may keep certain types of “exempt” property. The repayment plans may range somewhere between three and five years depending on income level and ability to repay debt.
What Type of Property You Can Keep in Chapter 13 Bankruptcy
In many instances, Chapter 13 bankruptcy is used by individuals who are unable to continue making payments on their home mortgage, car loan, or who have non-exempt property, such as jewelry that they would like to keep. Other people that frequently file for Chapter 13 bankruptcy instead of Chapter 7 bankruptcy are people that have certain debts that are nondischargeable under the law, such as tax liens.
Chapter 13 bankruptcies can stop foreclosures and repossessions. Many people want to stay in their homes, and Chapter 13 bankruptcy can help to solve the foreclosure crisis that plagues so many people.
Who Is Eligible for Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is for people only — not corporations. It is possible for individuals that are married to either file jointly or for just one to file and the other to stay out of the bankruptcy process, though this can be difficult if certain assets are in both parties names.
There are many requirements for eligibility to file under Chapter 13 of the Bankruptcy Code, including:
- Credit Counseling: All persons filing for Chapter 13 bankruptcy must first complete court approved credit counseling within six-months prior to filing your petition with the bankruptcy court.
- Filing Fees: Bankruptcy court filing fees and administrative fees must be paid in advance.
- Previous Bankruptcy: Individuals that have previously filed Chapter 7 bankruptcy in the last eight-years are only eligible to file under Chapter 13.
- Debts: Your “unsecured debts” must be less than $383,175 and your “secured debts” must be less than $1,149,525.
- Taxes: Your income taxes must be filed and must be current.
Obviously, this is not a complete list of the many requirements for Chapter 13 eligibility, but it serves to put your mind at ease if you believe that these main requirements fit your situation.
What is a Chapter 13 Repayment Plan
The most frequently asked question when it comes to Chapter 13 bankruptcies is: what is a chapter 13 repayment plan and how does it work?
The repayment plan lays out all of the details surrounding the debt, including what types of debt you have (credit cards, unsecured loans, secured loans, medical bills, etc.), how much of the debt will be paid, and how long you will have to make payments on that debt. The repayment plan revolves around the individual debtor’s “disposable income.”
If your current monthly income level exceeds the median income level in your home state your plan will probably last 5 years. If you have an income level below the median income level in your state, then you will likely be required to have a three year repayment plan. Of course, different factors in your financial situation can change these number, but these are the most common repayment terms for chapter 13 bankruptcy.
How Much Debt You Must Pay
In your Chapter 13 repayment plan you will have payments called “priority debts,” which will have to be paid in full. Priority debts include certain tax obligations, wages you owe to employees, and child support and alimony.
The repayment plan must include leftover disposable income you have left after making payments on your “priority debt” be allocated towards paying a portion of your unsecured debt — credit card debt, medical bills, etc. Disposable income is a person’s income (not counting child support payments that you may receive) minus the amount of money reasonably necessary to support yourself and any dependents that you may have. What this means is that the income left over after paying things such as rent, utilities and food for you and your family, will be used to make payments through your repayment plan.
A breakdown of what you must pay:
- Items you are 100% responsible for after filing Chapter 13:
- attorney fees, if you hired one
- filing fees ($310 as of June 1, 2014)
- commission to the bankruptcy trustee
- most tax debts
- back alimony & child support
- wages owed to employees
- contributions to employee benefit funds
- To keep your house you will have to pay 100% of defaults.
- All other secured debts will need to be 100% paid over the repayment term in order for you to keep them. This includes other property like your car.
- Anywhere between 0 and 100% of your unsecured debts will need to be paid depending on:
- Length of repayment term
- total value of your nonexempt property
- how much disposable income you have remaining after paying all the above required, “priority debts” are paid.
So, how much of your debt do you have to repay? It depends. For the most part, as long as all of your allocated disposable income is being used throughout your repayment plan, all of the debts do not have to be repaid in full (or in some cases, at all), but you do need to show the court that you’re putting a portion of disposable income towards debt repayment.
Next Steps
Most people contemplating Chapter 13 bankruptcy fail to get a copy of their credit score prior to their attorney consultation. It will be helpful if a bankruptcy attorney reviews your credit score so they can evaluate what debts are hurting you, and who the holder of the debts currently are (the original holder of the debt or a new collection company). Under federal law, each credit rating agency must give you one free credit report per year — obtain yours here.
You might be stressed out, confused, or scared to lose everything because of the debt that has been piling up. Chapter 13 bankruptcy was created for those who need to get the weight of debt off their backs. Get started today — contact a bankruptcy attorney for a 100% free consultation.