Chapter 13 Bankruptcy Overview
Chapter 13 Bankruptcy is a “reorganization” bankruptcy. It is basically a court-supervised debt repayment plan. Chapter 13 Bankruptcy allows you to restructure your debts into a payment plan that you can afford.
There are many different reasons why you might consider filing a Chapter 13 bankruptcy. Common reasons for Chapter 13 Bankruptcy are:
- You want to catch up on mortgage payments and avoid foreclosure
- You want to remove a second mortgage or home-equity line of credit from your home
- You do not qualify for a Chapter 7 Bankruptcy under the Income Test
- You have assets that would be liquidated in a Chapter 7 Bankruptcy
- You have tax problems
- You have a suspended driver’s license
- You have already filed bankruptcy filing
- You believe you should repay all or a portion of your debt
To make Chapter 13 Bankruptcy work for you, you must have a steady source of income, such as wages, business income, retirement benefits or government benefits, or the prospect of steady income in the near future.
However, in Chapter 13 Bankruptcy, there is no mandatory liquidation of your assets, which means you usually keep all of your assets.
This graphic gives a general overview of the Chapter 13 bankruptcy process:
To obtain Chapter 13 Bankruptcy protection, you file a “Petition” with the bankruptcy court that serves the area where you live or where your primary assets are located. Along with the Petition, you file various schedules that list your assets, your debts, your current income and expenditures, and several other pieces of information. The Court charges a $281.00 filing fee, although that fee could be paid in installments in some circumstances.
Once your Petition is filed, most actions by your creditors are blocked or suspended by the “Automatic Stay.” The Automatic Stay is a bankruptcy-related restraining order that prohibits your creditors from collecting on most types of debts. Most creditors cannot start or continue lawsuits, foreclose on or repossess your assets, garnish your wages or financial accounts, or even make telephone calls to you. Your creditors are notified of the bankruptcy filing by the court clerk which is sort of a bankruptcy restraining order against your creditors.
Your bankruptcy hearing (called the “Meeting of Creditors” or the “341 Hearing”) is generally held about a month your Petition is filed. You must attend the meeting. The hearing is conducted by the bankruptcy trustee. The trustee will ask you several questions about your financial affairs and your bankruptcy paperwork. Your creditors may also attend and are entitled to you questions about your financial affairs, although the creditors usually do not do so. The hearing usually lasts around ten to fifteen minutes.
After your hearing, the Bankruptcy Judge will review your proposed payment plan. Creditors and the bankruptcy trustee have the right to file formal objections to the plan if they believe the plan does not meet all the requirements of the bankruptcy laws. Once any objections have been resolved, the Judge will confirm (approve) the plan. If the objections cannot be resolved, you must either file a new plan or have your case dismissed.
Once the plan is confirmed, you are responsible for making the payments required by that plan, along with any other actions provided the plan.
How a Chapter 13 Payment Plan Works
In Chapter 13 Bankruptcy, you propose a plan to repay a percentage of your debt over a period of time ranging from three to five years. The amount of debt repaid will depend on your plan and your individual circumstances. Determining the exact amount of debt repaid will account for the value of some of your assets, your income and expenses, and other factors. Certain minimum payment amounts apply.
If your financial circumstances change during the life of your bankruptcy payment plan, such as employment changes, you can often amend your plan to account for your new circumstances. Or, if the changes make your plan totally unworkable, you may be able to convert your Chapter 13 payment plan to a Chapter 7 bankruptcy.
At the end of the payment plan, some debts will be paid in full and the remainder will be discharged. Some long term debts, like a student loan or a mortgage on a home that you keep, would survive the bankruptcy.
Comparison to Debt Repayment Plans
Chapter 13 Bankruptcy is commonly compared to using a debt management company or a debt consolidation plan. With a debt plan, you have to make payment arrangements with each of your creditors. Sometimes creditors may agree to flexible payment terms, but often you are forced to take the deal that the creditors offer you. And, a creditor need not agree to any payment arrangement, the creditor can insist on full payment according to the terms of your account. Even if one creditor will not go along with your plan, you plan could fail and you could be left vulnerable to foreclosures, repossessions, garnishment of your wages, and other unpleasant outcomes. In contrast, when you file for Chapter 13 bankruptcy protection, you establish your payment plan through the court with the approval of the bankruptcy judge. Then, you have the power of the bankruptcy court on your side and your creditors are bound by your plan.
Should I Use an Attorney to File for Bankruptcy?
Some people file a Chapter 13 Bankruptcy on their own, without the assistance of an attorney. However, this area of the law is complex and crafting a successful Chapter 13 bankruptcy plan is extremely complicated. A poorly -executed Chapter 13 filing could result in dismissal of your case, or a forced conversion to Chapter 7 and a liquidation sale of your assets. Therefore, we always recommend that you consult a bankruptcy attorney before filing for Chapter 13 bankruptcy petition on your own.
For more information about Chapter 13 bankruptcy, please see our summary of Frequently Asked Questions.