Individuals may fall behind on paying their bills for many reasons. These may include:
- Job loss;
- Unexpected expenses; and
- Other reasons.
When this occurs, one safety net an individual may consider is filing for bankruptcy. Bankruptcy is a process that allows a debtor the opportunity to get relief from their debt while treating creditors fairly. There are two basic forms of bankruptcy, a Chapter 7, or liquidation bankruptcy and a Chapter 13, or a reorganization bankruptcy.
What is Chapter 13 Bankruptcy?
A Chapter 13 bankruptcy is a reorganization form of bankruptcy. This option is usually for individuals with higher incomes and property they wish to protect from creditors that may be seeking to levy their assets.
A Chapter 13 bankruptcy permits the debtor to reorganize their debt and make affordable payments. There are some debts that may be discharged through the bankruptcy process. However, other debts are required to be paid in full within the timeframe of the bankruptcy payment plan.
There are several different factors that may impact how the debt is restructured or reorganized, including:
- The kind of debt the individual wants included. Some debts cannot be discharged, including:
- child support;
- student loans;
- federal, state, or local taxes;
- fines or penalties for breaking the law;
- child support;
- alimony; and
- other specific debts.
- The type of relationship the debtor and the creditor have regarding the debt;
- The debtor’s ability to pay off the amount within a reasonable time period; and
- The final determination of the bankruptcy judge regarding the debt.
How does Chapter 13 Bankruptcy Differ from Other Types of Bankruptcy?
There are several differences between Chapter 13 bankruptcy and other types of bankruptcies. For example, a Chapter 7 bankruptcy is a liquidation bankruptcy. In this type of bankruptcy, the debtor’s eligible debts are discharged. However, they must liquidate some of their property and sell it to satisfy the debt.
A Chapter 11 bankruptcy usually involves a high cost to the debtor and is often exercised for corporations or companies who are attempting to reorganize their debt in order to become profitable again. An individual debtor may be forced to use a Chapter 11 bankruptcy instead of a Chapter 13 if their debts exceed a maximum amount.
A Chapter 12 bankruptcy is available if 80% of the individual’s debt incurred is from operating a family farm or fishery. The farm may be classified as an individual, a corporation, or a partnership.
A Chapter 13 bankruptcy permits the debtor to retain their property and cease collection actions from creditors until they can establish a payment plan. This payment plan is created to satisfy most of the debtor’s outstanding debt at an affordable amount for a set number of years, often between 3 and 5 years. However, if the debtor’s debts exceed $1,184,200 or their unsecured debt exceeds $394,725, then they are not eligible for a Chapter 13 bankruptcy. This threshold may change.
Am I Eligible for Chapter 13 Bankruptcy?
There are several requirements an individual must satisfy in order to be eligible to file for Chapter 13 bankruptcy. These include:
- The debtor is an individual or a married couple. This includes individuals who operate an unincorporated business or are self-employed;
- The total secured debts do not exceed $1,184,200;
- The total unsecured debts do not exceed $394,725;
- The individual has not had a prior bankruptcy petition dismissed within the previous 180 days due to their failure to appear or comply with the court; and
- The individual has received credit counseling from an approved provider within 180 days of filing the petition.
What Do I Need to File a Petition for a Chapter 13 Bankruptcy?
In order to successfully file a petition for a Chapter 13 bankruptcy, it is important to have all documents completed correctly. It is also important that the documents contain all necessary relevant information. If an individual fails to include key information or forgets to include a form, they run the risk of delaying the bankruptcy process. The following is a list of what an individual should include in their bankruptcy petition:
- A list of all creditors including the amount owed to each and the nature of the debt;
- The source, frequency and amount of the individual’s income;
- A list of all of property;
- Detailed list of all monthly expenses;
- The debtor must file a certificate of completion of the approved credit counseling; and
- A copy of the individual’s recent tax return.
What Can I Expect After Filing My Petition for Chapter 13 Bankruptcy?
It is important to note that an individual’s Chapter 13 bankruptcy is not automatic once they have correctly filed their petition. After filing a petition, the debtor can expect the following to occur:
- An automatic stay of collection activity occurs once the debtor has filed the petition. Following this automatic stay, debt collectors must stop contacting the debtor;
- Filing bankruptcy can give the debtor the opportunity to stop a foreclosure on their home and give them time to catch up on missed mortgage payments and back taxes;
- A trustee will be appointed to manage the bankruptcy case. The debtor will have to provide detailed information to them about the debtor’s finances;
- A monthly payment plan that has been approved by the court will be put into place. Those payments may be deducted directly from the debtor’s paycheck; and
- The debtor will have to give up their credit cards and stop using lines of credit to manage their expenses.
Are there any Negative Consequences to Filing Chapter 13 Bankruptcy?
Yes, there are negative consequences to filing a Chapter 13 bankruptcy. There are pros and cons of filing for bankruptcy. If a debtor is concerned about the potential consequences, they should consider the following before filing for a Chapter 13 bankruptcy:
- The debtor must comply with a strict budget during the life of the payment plan without the assistance of any lines of credit;
- Many individuals drop out of the payment program before finishing, so the debtor should make sure they are committed to the plan; and
- Filing bankruptcy can have a negative impact on the debtor’s credit report for up to 10 years after filing.
What is a Forced Conversion Hearing?
After an individual files for a bankruptcy, the court may find that a different bankruptcy chapter applies instead. In those cases, a forced conversion occurs and the court changes the bankruptcy chapter to the appropriate one. For example, if the debtor filed for a Chapter 7 bankruptcy, the court may determine they have enough income to repay their creditors and may convert the bankruptcy into a Chapter 13 instead.
Should I Consult a Lawyer About Filing for Chapter 13 Bankruptcy?
It is essential to have the assistance of an experienced bankruptcy lawyer for any Chapter 13 bankruptcy issues you may face. If you are considering filing for bankruptcy, a lawyer can review your situation and determine if it is a good idea for you. If you have decided to file for bankruptcy, your attorney can help you determine which type you are eligible to file.
Your attorney will assist you in preparing all necessary documents, filing your bankruptcy petition, and will represent you during any court proceedings. It is important to consider the risks and benefits of bankruptcy prior to filing, and an attorney’s advice is invaluable.