Many individuals who are overwhelmed with their debt choose to file for Chapter 13 bankruptcy. This type of bankruptcy is also known as the wage earner’s bankruptcy, even though that name may be slightly misleading.
Chapter 13 and Chapter Chapter 7 bankruptcy are the two main chapters available for consumer bankruptcies. The main difference between the two is that the debtor filing a Chapter 7 bankruptcy must sell off their property in order to satisfy their debts and by filing for Chapter 13, the debtor may keep some property.
What is Bankruptcy Court?
Most individuals are not aware that there is a separate United States court system that handles only bankruptcy cases. The Constitution of the United States authorized laws that govern bankruptcy. The U.S. Congress has since passed and repeatedly amended these laws.
Bankruptcy courts were established in order to administer the bankruptcy laws. Bankruptcy court is part of the United States federal court system.
There are almost 100 federal districts across the United States. Each one of these districts has their own bankruptcy court.
Bankruptcy court judges have the authority to decide any issue that is related to a bankruptcy case. This includes issues such as whether an individual is eligible to file bankruptcy or whether the debtor should be permitted to discharge their debt.
How is Bankruptcy Court Different from Other Courts?
Bankruptcy courts have authority over all aspects of a bankruptcy proceeding. Similar to other federal courts, the decision of a bankruptcy judge is binding.
The main aspect that sets a bankruptcy court apart from other courts is the role that it plays in the bankruptcy case. Other courts involve a winner or loser scenario, where guilt or innocence is determined, such as in criminal court, or a lawsuit where one party wins and the other loses and must pay, such as in civil courts.
Bankruptcy court, on the other hand, allows all parties to win in some manner. The main goal of bankruptcy is to find a midpoint between the money owed by a debtor who is unable to pay and ensuring the creditor is paid what they are due.
Another factor that sets the bankruptcy court apart from other federal courts is the appeals process. Because these courts were created by Congress and not from the Constitution, the appeal process begins at the federal trial court level instead of at the appeals court level.
In some circuits, a Bankruptcy Appellate Panels (BAP) is used to handle bankruptcy appeals. These circuits that use BAPs include:
- The First Circuit;
- The Sixth Circuit;
- The Eight Circuit;
- The Ninth Circuit; and
- The Tenth Circuit.
Bankruptcy courts also have a limited jurisdiction compared to other federal courts. This means they are only permitted to hear issues that arise from a bankruptcy.
If any other issue arises, such as a modification of child support, the bankruptcy court is not permitted to hear it. On the other hand, a federal trial court may address any non-bankruptcy issues that arise, so long as no other restrictions apply.
Am I Eligible for Chapter 13 Bankruptcy?
There are several requirements for filing for Chapter 13 bankruptcy. These include:
- Being an individual or a married couple, including if operating a unincorporated business or being self-employed;
- The total secured debts are less than or equal to $1,184,200;
- The total unsecured debts are less than or equal to $394,725;
- There has not been a prior bankruptcy petition dismissed within the last 180 days due to failure to appear or comply with the court; and
- The individual or couple received credit counseling from an approved provider within 180 days of filing their bankruptcy petition.
What Do I Have to Do Before Filing for Chapter 13 Bankruptcy?
As noted above, an individual must attend credit counseling prior to filing for Chapter 13 bankruptcy. The main component of a Chapter 13 bankruptcy is the repayment plan, which will be developed after counseling.
Prior to 2005, an individual could choose between a Chapter 13 and a Chapter 7 bankruptcy. However, changes to the Bankruptcy Code passed in 2005 now require a debtor to submit to a means test.
This means test determines whether or not a debtor has the means to repay their creditors. Should it be determined the debtor does not have the means to repay, they may choose between Chapter 7 and Chapter 13. Should it be determined the debtor does have the means, they may file for Chapter 13 if they meet the qualifications discussed above.
Once this process is complete, the individual may file with the bankruptcy court. The judge will issue an automatic stay, which prohibits any collections attempts against the individual’s property.
The individual will then be required to submit a large volume of paperwork to the court which includes information regarding the individual’s assets, debts, and personal information. The bankruptcy court strongly recommends every filer hire an attorney to assist them.
Will the Court Confirm my Repayment Plan?
An individual will submit their debt repayment plan to the bankruptcy court. Should the court accept the plan, the judge will assign a trustee to the case.
If the individual is determined to have the means to repay, their plan may be 3 or 5 years. If the individual is determined not to have the means to repay, their plan will be 5 years. During this time, the individual will make payments to the trustee, who will distribute those payments to the creditors.
The bankruptcy court will confirm the repayment plan if the plan passes:
- The disposable income test;
- The feasibility test;
- The best interest test; and
- The good faith test.
The disposable income test means the debtor will use all of their disposable income, minus reasonable expenses, to fund the plan. This includes income, not wages. Things that may count as income include:
- Social Security;
- Disability income;
- Allowances from parents; and
- Gifts from dating partners.
The feasibility tests means the debtor must propose a plan that they have a realistic chance of following. For example, if the debtor proposes to pay the creditors $1,000 monthly but only has $800 of monthly income, the plan will not be feasible.
The best interest test required the debtor to propose a plan that does not make unsecured creditors worse off than they would be in a Chapter 7 bankruptcy. For example, if an unsecured creditor, such as a credit card company, would have been paid $500 in a Chapter 7, the debtor may not choose to pay the creditor less than $500 in the Chapter 13.
The good faith test requires the debtor to propose a plan in good faith and not break any laws by performing the plan. This test prevents a debtor from abusing the system to cheat a creditor. For example, the debtor is required to pay child support by the Bankruptcy Code. if a plan contributes nothing to child support, the plan will be denied.
Can the Repayment Plan Be Modified?
A repayment plan can usually be modified. The debtor, trustee, or an unsecured creditor may submit a request to the court to change the plan. It may be changed to increase or reduce payments, reduce or extend the time required to complete the plan, or change the amount that is paid to certain creditors.
If the debtor loses their employment, they may ask the judge to reduce the payments they are required to make under the plan. If the debtor inherits a large amount of money, the trustee may ask the judge to increase the payment amounts.
In some circumstances, the Bankruptcy Code permits a debtor to request a payment reduction in order to purchase health insurances. One of the conditions is if the insurance is reasonable and necessary.
Once the debtor has completed their repayments, a final hearing will be held in bankruptcy court. At that time, the judge will discharge all remaining debts.
Do I Need a Lawyer?
It is important to have the assistance of an experienced bankruptcy lawyer for any Chapter 13 bankruptcy issues you may have. Filing for bankruptcy can be intimidating and overwhelming. One simple mistake can cause your case to be dismissed.
Your lawyer can assist you in completing and filing paperwork, creating your repayment plan, and represent you during any court proceedings. An attorney may be your ticket to financial freedom.