Many people experiencing overwhelming debt choose to file Chapter 13 bankruptcy. This is also known as "Wage Earner" bankruptcy, although the name is somewhat misleading. The biggest difference between Chapter 13 and Chapter 7 bankruptcy is that in Chapter 7 debtors must sell their property to pay off their creditors. Most people file for Chapter 13 bankruptcy because they want to keep the property they possess.
Bankruptcy courts have a standard schedule when proceeding with these cases.
What Do I Have To Do Before Filing for Chapter 13 Bankruptcy?
Before accepting a Chapter 13 filing, the Bankruptcy court requires that you undergo credit counseling. At the heart of a Chapter 13 filing is your debt repayment plan, which you should develop after your counseling.
Before 2005, debtors could freely choose between Chapter 13 bankruptcy and Chapter 7 bankruptcy. After Congress passed the 2005 changes to the Bankruptcy Code though, debtors had to submit a "means test."
The means test measures whether the debtor has the income to pay creditors. If the debtor passes the means test, the debtor may choose to file either a Chapter 7 or a Chapter 13 bankruptcy. If the debtor fails the means test, the debtor must either file for Chapter 13, if the debtor files for bankruptcy at all.
Once this is complete, you can file with the Bankruptcy court. The judge will immediately issue a "stay," which stops any collection action against you or your property. You then are required to submit a good deal of paperwork to the Bankruptcy court, including detailed information regarding your assets, debts, and personal information.
Will the Court Confirm my Repayment Plan?
You also submit your debt repayment plan to the Bankruptcy court. If the court accepts your plan, the judge will assign a trustee to your case. Over the life of the repayment plan you are responsible for making timely payments to the trustee, who will then distributes those payments to your creditors.
The length of the repayment plan depends on the results of the means test. If the debtor passed the means test, the debtor may choose whether the plan is three or five years. If the debtor failed the means test, the plan will be five years long.
The Court will confirm the repayment plan if the plan passes:
- The Disposable Income Test: the debtor uses all of his or her disposable income, minus reasonable expenses, to fund the plan. The plan uses income, not wages. Social security, disability income, allowances from parents, or even gifts from dating partners may count as income.
- The Feasibility Test: the debtor must propose a plan which has a realistic chance of succeeding. If the debtor proposes to pay $500 to creditors monthly, but the debtor only makes $400 monthly income, the plan would be infeasible.
- The Best Interest Test: the debtor must not propose a plan which makes unsecured creditors worse off than they would be in Chapter 7 bankruptcy. If unsecured creditors (like credit card companies) would have been paid $1000 in Chapter 7, the debtor must not pay those unsecured creditors less than $1000 in Chapter 13.
- The Good Faith Test: the debtor must propose the plan in good faith and not break any laws by performing the plan. This test prevents debtors from abusing the system to cheat creditors. For example, the Bankruptcy Code requires that debtors pay child support. If a debtor contributes nothing to child support in his plan, the court will deny the plan.
Can the Repayment Plan Be Modified?
Yes. The debtor, trustee, or an unsecured creditor can ask the court to change the plan. The plan can be changed to increase or reduce payments, extend or reduce time required to complete the plan, or change the amount given to certain creditors.
If the debtor loses his or her job, the debtor can ask the judge to reduce the payments required under the plan. If the debtor inherits a large pot of money, the trustee can ask the judge to increase payments. If the debtor’s child begins college, the mother can ask the court to increase child support payments from $500 a month to $700 a month.
Under certain conditions, the Bankruptcy Code actually allows debtors to ask for payment reduction to purchase health insurance. One of those conditions is if health insurance is "reasonable and necessary." Given that Obamacare mandates for everyone to purchase health insurance, it is unknown if debtors will be required to buy health insurance despite being bankrupt.
Once you have completed your repayments, there will be a final hearing in the Bankruptcy court. At that time, the judge will discharge all remaining debts.
Do I Need a Lawyer?
Filing for Chapter 13 bankruptcy can be very complicated. Creating a repayment plan that a bankruptcy court would approve can be challenging by itself. An experienced bankruptcy attorney can make all the difference.