Bankruptcy is a type of legal procedure that is used in order to assist a person or business in obtaining relief from debt. Depending on the chapter of bankruptcy for which an individual or organization files, this may involve restructuring and/or petitioning a federal bankruptcy court to reduce or eliminate some of their debts.
Recently, there have been an increasing number of individuals and businesses filing for bankruptcy due to the COVID-19 pandemic. Lack of jobs and income are two of the primary causes cited that have contributed to the growing number of persons and businesses seeking legal relief from debt.
The U.S. Bankruptcy Code is the main source of bankruptcy law in the United States. Although the Code outlines the requirements for several different chapters of bankruptcy, most individuals file for bankruptcy under Chapter 7 or Chapter 13. In comparison, many businesses tend to file for bankruptcy under Chapter 11.
It may be in your best interest to consult with a local bankruptcy lawyer before filing for any chapter of bankruptcy due to the fact that the standard bankruptcy rules have changed since COVID-19.
What is Chapter 13 Bankruptcy?
A debtor may opt to file for Chapter 13 bankruptcy when their income exceeds the level required for other forms of bankruptcy (usually Chapter 7) and want to protect certain property or assets from the reach of creditors. In some cases, the bankruptcy court may order a debtor to convert a Chapter 7 bankruptcy filing into a Chapter 13 if the court determines that the debtor can afford to repay their debts.
Chapter 13 bankruptcy provides a way for the debtor to pay off their outstanding debts over a longer period of time, which is normally set between three and five years. The debtor will be required to create and file a Chapter 13 repayment plan with the court for approval. Depending on which time frame is approved, the debtor will have somewhere in between three and five years to pay down their debts.
Debtors are permitted to request an extension if they suffer some sort of financial setback or encounter an emergency financial issue, but most debtors generally aim to pay off their debt within the length of time prescribed by the court.
It should be noted that not all debts may be discharged through the bankruptcy process. For example, debt related to child support, alimony, or taxes is not dischargeable under federal bankruptcy law. However, the court may consider those types of debts when deciding on the appropriate length of time for the debtor’s repayment plan.
How Does Chapter 13 Bankruptcy Differ from Other Types of Bankruptcy?
Depending on which chapter of bankruptcy an individual is comparing Chapter 13 bankruptcy to, there may be many differences between filing for Chapter 13 bankruptcy versus filing under a separate chapter of bankruptcy, such as Chapter 7 or Chapter 11.
For instance, the Chapter 7 bankruptcy process usually involves selling off the debtor’s property as a means to decrease the amount of outstanding debt that they owe to creditors. This is why Chapter 7 bankruptcy is sometimes referred to as liquidated bankruptcy—the property is sold (i.e., “liquidated”) in exchange for discharging some amount of debt.
In contrast, Chapter 13 bankruptcy allows a debtor to keep their property and puts a temporary hold on any collections from creditors until the debtor can establish their repayment plan.
As discussed above, a repayment plan budgets out a specific amount to be paid every month over a period of three to five years. If the debtor does not believe they will be able to afford or accomplish paying off the total amount of debt by the end of their repayment plan, they may ask for an extension from the court.
Another type of bankruptcy that a debtor may file for and that is different from Chapter 13 is a Chapter 11 bankruptcy. Chapter 11 bankruptcy is typically reserved for businesses that are attempting to reorganize their debt in order to become profitable again, as opposed to having to completely shut down the business.
In some instances, individuals may file for Chapter 11 bankruptcy as well when they do not qualify for Chapter 13 or would like to enjoy some of the protections that Chapter 11 bankruptcy offers, such as the elimination of the requirement that the debtor have a regular income.
While Chapter 13 bankruptcy may permit a debtor to repay their debts over a longer period of time, it does not let them restructure it in the way that a Chapter 11 bankruptcy permits. Chapter 13 bankruptcy also mandates that debtors fulfill the regular income requirement.
Am I Eligible for Chapter 13 Bankruptcy?
To be eligible to file for Chapter 13 bankruptcy, a debtor must satisfy the following requirements:
- Regardless of whether they are married, are self-employed, or are an unincorporated business, a debtor must file as an individual;
- A debtor must have enrolled in a credit counseling course from an approved credit agency within 180 days of filing their Chapter 13 bankruptcy petition;
- The total amount of secured debts that a debtor owes must be either equal to or less than $1,184,200;
- The total amount of unsecured debts that a debtor owes must be either equal to or less than $394,725; and
- A debtor must not have had a prior bankruptcy petition dismissed by the bankruptcy court within the last 180 days from the date of filing based on a failure to comply with the court’s instructions or for failing to appear at their bankruptcy hearing.
What Do I Need to File a Petition for a Chapter 13 Bankruptcy?
In order for a Chapter 13 bankruptcy petition to be valid, there are several important documents that debtors will generally be required to attach and submit along with the main petition form. Debtors who fail to provide this information or forget to file it as part of their application may run the risk of delaying the bankruptcy process.
Some examples of the types of information that may be necessary to file a complete Chapter 13 bankruptcy petition include the following:
- A list of all the debtor’s property and/or assets;
- A detailed list of the debtor’s recurring monthly expenses;
- Documentation that provides proof of the debtor’s main sources of income, the frequency in which the debtor receives that income (e.g., monthly, weekly, etc.), and the amount of that income;
- A list of all creditors that the debtor owes, the amount of debt that the debtor owes those creditors, and the nature of the debt (e.g., secured or unsecured debt);
- A copy of the debtor’s most recent tax return; and
- The certificate of completion the debtor received upon finishing the mandatory credit counseling course they were required to take before filing for bankruptcy.
Are there any Negative Consequences to Filing Chapter 13 Bankruptcy?
As with any chapter of bankruptcy, there are a few negative consequences that might occur as a result of filing for Chapter 13 bankruptcy. Some potentially negative consequences that debtors may encounter after filing a petition for Chapter 13 bankruptcy include:
- Having to abide by strict budgetary guidelines for up to five years (or now longer);
- Not having access to lines of credit for extra or emergency financial support;
- Maintaining a low credit score for up to ten years after filing since being declared bankrupt typically has a negative impact on a debtor’s overall credit score;
- Still having to pay off debts that cannot be discharged in bankruptcy (e.g., alimony, child support, etc.); and
- Securing a mortgage or similar lending arrangement will become much more difficult.
How Does COVID-19 Affect Chapter 13 Bankruptcy Filings?
COVID-19 has affected Chapter 13 bankruptcy in a number of ways. As previously mentioned, the typical time frame of a Chapter 13 repayment plan was originally three to five years. After the pandemic, however, Chapter 13 repayment plans may now exceed the maximum five years. Instead, debtors who are experiencing hardships as a result of COVID-19 may ask to have their repayment plan extended for up to seven years.
In addition, debtors who are able to make monthly payments to creditors under an extended repayment plan will be permitted to pay less each month to their creditors than what was originally agreed to in their initial repayment plans.
There are also new rules regarding when different payments are due. For instance, mortgage creditors will need to negotiate with debtors to modify or defer mortgage payments still owed to them, but not paid due to COVID-19. The same holds true for debtors who make mortgage payments to their appointed bankruptcy trustee, as opposed to a creditor.
Lastly, another major way that COVID-19 has affected Chapter 13 bankruptcy filings is that many bankruptcy trustees have allowed debtors to ask for longer temporary stay periods on certain payments, penalties, or enforcement proceedings involved in a bankruptcy case. This applies to Chapter 13 bankruptcy debtors, regardless of whether they are experiencing a hardship that qualifies under COVID-19 regulations or not.
Should I Consult a Lawyer About Filing for Chapter 13 Bankruptcy?
It is strongly recommended that persons attempting to declare Chapter 13 bankruptcy consult with a local bankruptcy lawyer before filing a petition in court. A lawyer who has experience in handling Chapter 13 bankruptcy cases will be able to guide you through the entire bankruptcy process and can make sure that you understand your rights as well as your obligations under the relevant bankruptcy laws.
Your lawyer can assist you in drafting the mandatory Chapter 13 bankruptcy plan for your filing and any other legal documents that may be necessary to support your case. Also, if you need to amend your bankruptcy paperwork because of an error or have discovered that you need to convert the chapter of bankruptcy for which you filed due to unforeseen circumstances, your lawyer will be able to help you with these procedures as well.
In addition, your lawyer can provide legal representation during your bankruptcy hearing or at any other legal proceedings related to your Chapter 13 and/or another bankruptcy case. Your lawyer can also attend the 341 meeting of the creditors with you if you would like them present to ask questions on your behalf or to clarify the end results.
Finally, should any issues arise after the court approves your petition for bankruptcy, your lawyer will be able to offer guidance on how you can resolve those matters too.