What Is Chapter 13 Bankruptcy And How To Succeed In Filing For It?
Chapter 13 bankruptcy is usually one of the two most common options you have to choose when filing for bankruptcy. What makes this different from Chapter 7 is that a Chapter 13 bankruptcy essentially reorganizes your debts, making it possible for you to hold on to some assets. Under Chapter 13, you will be required to pay a specific amount every month under a specified number of years. After the allotted time, all remaining balances will be discharged by the creditor.
Requirements for Bankruptcy Chapter 13
Understand that you just cannot choose to declare Chapter 13 Bankruptcy or even Chapter 7. You must first go through a testing process in order to find out whether you qualify for this financial bailout. That being said, the government enforces a lot of requirements that you will have to meet before pursuing the case. The following are some of the requirements you will need to have:
- You are filing for bankruptcy as an individual and not as a business entity. Couples or those who are filing as husband and wife may also be eligible for a Chapter 13 Bankruptcy.
- You were not declared bankrupt by the court within the last two years under Chapter 13. Being declared bankrupt under Chapter 7 within the last 4 years also invalidates your right to claim bankruptcy.
- If your bankruptcy case was dismissed within the last 180 days, then pursuing another filing will be rejected by the courts.
- Chapter 13 Bankruptcy is available for those who have solid sources of income and simply need a bit of leeway to stay paying their debts. For this reason, those who are qualified under Chapter 13 bankruptcy must have a debt margin of at most $336,900 unsecured debt, although the numbers may change depending on the state. As for secured debt, your liabilities must be no higher than $1,010,650 in order for you to qualify.
- You must have enough money to start paying the debts. This is computed by finding out your income minus all allowable expenses after which, there should be enough amount dedicated for paying the liabilities. Understand that when filing for bankruptcy, you may include as your income proceeds from a working spouse although the said spouse did not file for bankruptcy.
- You must have proposed a payment plan that takes care of all the required liabilities. Priority of payment usually goes to unsecured debts, alimony, as well as child support. This is followed by secured debts such as tax liens – all of which must be paid in full.
- Unsecured debts that fall within the non priority description must also be paid, approximately equal to any non-exempt property that they keep after filing for Chapter 13.
- Lastly, individuals who are filing for Chapter 13 must have proof of tax payment for the last 4 years; otherwise, their case might be dismissed in court.
Filing for Bankruptcy Chapter 13
Filing for bankruptcy Chapter 13 can be done with or without the help of a lawyer. Understand though that the chances of getting approved under Chapter 13 without a lawyer is very slim – less than 1% in fact. On the other hand, having a lawyer on your side increases your chances of getting approved to more than 50%, even though you have to pay for attorney services amounting to $1,500 or more, depending on your location.
In the event that you decide to file for Chapter 13 Bankruptcy yourself, however, the following are the steps you must follow:
Chapter 13 Means Test
The Means Test is essentially a test weighing whether you are qualified for Chapter 13 filing. The form attached to this test is called Form 22C – Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income. The concept of computation is simple: it aims to find out whether an individual still has sufficient disposable income after paying for all the basic necessities. Failing that, a Chapter 7 Bankruptcy might be the better option.
Filing a Petition
Once you have determined whether you are qualified or not, the next step is to file a petition to the courts where you reside. A petition usually involves several schedules including: (1) assets and liabilities, (2) income and expenditures, (3) executor contract and unexpired leases, and (4) statement of financial affairs.
Creating a list of the following is also important if you want to complete the petition: (1) list of creditors with their corresponding claims and the type of claim attached, (2) list of all the assets of the person in debt, (3) source of income as well as amount and frequency of acceptance, and (4) detailed list of expenses per month.
Credit counseling is mandatory although it is not really extensive. Note though that you will have to pay for this one and submit it together with the petition documents. Credit counseling usually costs around $30 and provides data on additional documents which are needed to pursue bankruptcy.
The additional documents include: (1) repayment plan, stemming from the credit counseling process, (2) evidence of payment from employers received within 60 days of filing, (3) interest obtained from a state or federal educational institution, (4) monthly income, and (4) possible increase in expense or income after submitting the paperwork. All forms can be purchased or downloaded and printed online.
Note that since you will be filing without the benefit of a lawyer, it is important to first make sure that you have all the right documents needed for the transaction. The court will be kind enough to notify you if any important form is missing and will expect a prompt response, otherwise the case could be dismissed.
Now this might seem counterproductive, but the court will actually require you to pay certain fees during the bankruptcy filing process for Chapter 13. The amount totals to $310 and is paid directly to the court clerk upon giving the petition. The option to pay the said amount through installments is also there with a required completion of 120 days after submitting the petition.
Automatic Stay Upon Filing
The same with Chapter 7, filing the petition automatically stays the creditors from hounding, harassing, or asking for their money back. The petition formally pauses this from happening and all matters of payment must now be dealt with through the courts. This is why a list of creditors must be provided since the clerk will be responsible for contacting all these people and ensuring that they are informed of your bankruptcy petition. The good news here is that the stay extends to co-debtors. This means that the creditors cannot go to someone who is also responsible for the credit since they too are covered by the petition. However, this only applies to consumer debts or debts that were used specifically for personal purposes.
Meeting of Creditors
The meeting of creditors is scheduled within 60 days after you file for bankruptcy Chapter 13. The meeting is essentially the time for the trustee, creditor, as well as debtor to talk about the state of financial affairs of the latter. Questions will be asked regarding the validity and rightness of the petition, as well as the payment plan proposed by the debtor. Changes may be made depending on the results of the conversation. It is in the petitioner’s best interest to make sure that all forms and documents are completely and properly filed before the meeting, putting them in a better position of getting what they want at the end of the discussion.
Chapter 7 Bankruptcy filings typically have a single meeting, but with Chapter 13, you will find that there are two events that the petitioner must attend. The second one is a court hearing discussing the repayment plan of the petitioner. This essentially solidifies the case whereupon, the petitioner can start paying according to the plan.
Modifying the Plan
Note that it is completely possible for the court to deny the repayment plan instead of confirming it. If this happens, the petitioner can alter the plan to make it more acceptable. There are also instances when the plan must be changed to make way for problems. For example, a creditor must have been forgotten on the list or perhaps one of the creditors objected to the plan. If this happens, modification is possible even after confirmation has been made.
Discharge is given when the requisite 3 to 5 years have elapsed and the payment plan has been followed to perfection, reaching the targeted repayment amount for all the creditors involved. Understand though that the rules for discharge often changes so you might want to ask about this with a lawyer.
Typically, the discharge papers will be given when: (1) the payment plan is completed, (2) the petitioner did not receive a discharge in a previous case spanning 2 years of Chapter 13 and four years for Chapter 7, (3) paid all domestic support obligations, and (4) completed a course in financial management should the trustee deem it necessary.
Pros and Cons of Chapter 13
- Chapter 13 is often used as one of the most effective ways to prevent yourself from losing your home. If you are late with the mortgage payments with a looming foreclosure, filing a petition automatically stops the said foreclosure. Individuals can then start making proper payments to keep up with their liabilities, effectively stopping the foreclosure and allowing them to retain their home.
- Chapter 13 offers protection for co-debtors, preventing creditors from going after them under the law. In fact, even the petitioner is protected because the money is given to a trustee who then takes care of distribution to various creditors.
- It offers the chance of rescheduling secured loans while giving priority to unsecured ones. This is crucial since secured loans are backed up by assets and may be lost without the stay and protection of Chapter 13.
- Regardless of the reorganization of the loan, a Chapter 13 filing will reflect badly on the credit report of the petitioner. This will stay for years in the accounts and can therefore negatively impact a person’s borrowing power.
- It can be tough to gain approval for a Chapter 13 Bankruptcy – even harder than a Chapter 7.
Hiring a Bankruptcy Lawyer
Learning how to file for Bankruptcy Chapter 13 on your own is a good idea if you are confident that your financial situation and proposed repayment plan is flawless. If not, however, it is strongly recommended that you find an attorney to deal with this matter. The fact is that lawyers can significantly increase your chances of acceptance since they: (1) are familiar with the necessary paperwork, (2) they understand the process of filing, (3) they can offer excellent representation during the meeting, and (4) they can provide legal advice on what you should do next in the event of problems.
If you are in doubt about getting a lawyer due to the expense, there are currently pro bono lawyers who are operating within the system. You can contact free lawyers for bankruptcy and find yourself properly represented without worrying about the cost.
Tips on DIY Filing for Chapter 13
Of course, if you are still intent on doing all this by yourself, the following are some tips and tricks on how to lower any chances of mistakes and dismissal:
- Order your credit report from all three bureaus for free. This will give you the chance to completely assess your debts, how much they amount to and to whom. Creditors often submit reports to credit bureaus, but not to all three so getting them all helps you cover all bases.
- Understand the exact nature of your debts. There are secured and unsecured loans, and priority and non-priority loans. Finding out exactly which ones fall under specific creditors will give you a much better chance to plan.
- Use the Internet when checking your paperwork. There are currently websites, programs, or apps that can help you file for bankruptcy and tell you whether you have missed a few forms along the way. This should ensure that no stone is left unturned.
- Always be open for communication with your trustee and respond immediately to all attempts to talk with you.
Understanding what is Chapter 13 bankruptcy and the scope of the law makes it easier to decide whether this is the proper choice for your financial worries. Keep in mind that bankruptcy should always be a last resort when it comes to financial problems since they have a long standing impact on the monetary situation of an individual.