People can fall behind on paying their bills for a number of reasons: illness, job loss, unexpected expenses, etc. When this happens to you or your family, one safety net may be filing for bankruptcy.
Bankruptcy allows the debtor the opportunity to get out from under toppling debt while treating creditors fairly. There are basically two forms of bankruptcy: reorganization and liquidation.
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is the reorganization form of bankruptcy. This option is typically for people who have higher incomes and property they want protected from creditors seeking to levy those assets.
Chapter 13 allows the debtor to reorganize the debt and make payments they can afford. Some debts may be discharged through this process while others are required to be paid in full within the timeframe of the bankruptcy payment plan. There are different factors that can impact how the debt is reorganized or restructured including:
- The kind of debt you want included. Some debt cannot be discharged such as child support, student loans, taxes, etc.;
- The type of relationship you and the creditor have regarding the debt;
- Your ability to pay off the amounts within a reasonable time period; and
- The bankruptcy judge’s final determinations regarding the debt.
How Does Chapter 13 Bankruptcy Differ from Other Types of Bankruptcy?
Chapter 7 bankruptcy is a liquidation process in which the debt is removed from the debtor in exchange for liquidating at least some of their property and selling it off to satisfy some of the outstanding debt.
Chapter 11 bankruptcy typically involves a high cost to the debtor and is usually exercised for companies or corporations who are trying to reorganize their debt to become profitable again. Individuals may be forced to use Chapter 11 bankruptcy instead of 13 if their debts are over a maximum amount.
Chapter 12 bankruptcy is available if 80% of the debt incurred is from operating a family farm or fishery.
Chapter 13 allows you to keep your property and stop collection action from creditors until a payment plan can be established. The payment plan is set up to satisfy most of the outstanding debt but at an affordable amount per month for the debtor for set number of years, usually between 3 and 5 years. However, if your secured debts are over $1,184,200 or your unsecured debt is over $394,725 then you are not eligible for Chapter 13. This threshold may change in 2019.
Am I Eligible for Chapter 13 Bankruptcy?
If you meet the following requirements, then you can file for Chapter 13 bankruptcy:
- You are an individual or married couple, including if you operate a unincorporated business or are self-employed;
- Your total secured debts are or are under $1,184,200;
- Your total unsecured debts are or are under $394,725;
- You have not had a prior bankruptcy petition dismissed within the last 180 days due to you failing to appear or comply with the court; and
- You received credit counseling from an approved provider within 180 days of filing your petition.
What Do I Need to File a Petition for a Chapter 13 Bankruptcy?
In order to successful file a petition for Chapter 13 bankruptcy, it’s important to have all of your documents filled out correctly with all of the relevant information. If you fail to include key information or forget a form, then you run the risk of delaying the process. Here is a list of what you should include in your petition:
- A list of all creditors including the amount you owe and the nature of the debt;
- The source, frequency and amount of your income;
- A list of all of your property;
- Detailed list of all of your monthly expenses;
- You must also file a certificate of completion of the approved credit counseling; and
- Copy of your recent tax return.
What Can I Expect After Filing My Petition for Chapter 13 Bankruptcy?
Sadly, your chapter 13 bankruptcy isn’t automatic once you correctly file your petition. Afterwards, you can expect the following to occur:
- An automatic stay of collection activity occurs once you have filed the petition; debt collectors must stop contacting you;
- Filing can give you the opportunity to stop a foreclosure on your home and give you time to catch up on missed mortgage payments and back taxes;
- A trustee will be appointed to manage your case and you will have to provide detailed information to them about your finances;
- A monthly payment plan that has been approved by the court will be begin and the payments may be deducted directly from your paycheck; and
- You will have to give up your credit cards and stop using lines of credit to manage your expenses.
Are there any Negative Consequences to Filing Chapter 13 Bankruptcy?
Yes. There are always pros and cons when it comes to filing for bankruptcy. If you are concerned about the potential fallout, then you should consider the following before you file bankruptcy:
- You must comply with a strict budget during the life of the payment plan without the assistance of lines of credit;
- Many people drop out of the program before finishing, so make sure you are committed; and/or
- Filing bankruptcy can have a negative impact on your credit for up to 10 years after filing.
What is a Forced Conversion Hearing?
After filing for one bankruptcy chapter, the court may find that a different chapter applies instead. In that case, a forced conversion occurs and the court changes the chapter to the appropriate one. For example, if you filed chapter 7, the court may find you have enough income to repay creditors and put you into chapter 13 instead.
Should I Consult a Lawyer About Filing for Chapter 13 Bankruptcy?
Yes, a bankruptcy lawyer can evaluate your financial situation and help you file for the correct relief. They can also assist you in preparing all the documents necessary to file a petition and represent you in court.