Chapter 13 bankruptcy, also known as a wage earner’s plan, provides individuals with regular income the opportunity to develop a repayment plan for their debts. This chapter allows debtors to propose a plan to make installments to creditors over a period of three to five years. During this time, creditors are prohibited from initiating or continuing collection efforts. This article will discuss the advantages of choosing Chapter 13, eligibility requirements, the process of a Chapter 13 proceeding, making the plan work, and the special Chapter 13 discharge.
Advantages of Chapter 13
Chapter 13 offers several advantages over liquidation under Chapter 7. One significant advantage is the opportunity to save homes from foreclosure. By filing under Chapter 13, individuals can stop foreclosure proceedings and gradually catch up on delinquent mortgage payments. However, they must continue making all mortgage payments on time during the plan. Chapter 13 also allows for the rescheduling of secured debts (excluding mortgages for primary residences) and extending them over the life of the plan. This can result in lower payments. Additionally, Chapter 13 provides a special provision that protects co-signers on “consumer debts,” potentially shielding them from liability. Lastly, Chapter 13 functions as a consolidation loan, where individuals make plan payments to a trustee who then distributes them to creditors. Debtors have no direct contact with creditors during this period.
Chapter 13 Eligibility
Any individual, including self-employed or unincorporated business owners, is eligible for Chapter 13 relief if their total secured and unsecured debts are below $2,750,000 at the time of filing. An individual cannot file for Chapter 13 if they had a previous bankruptcy petition dismissed within the preceding 180 days due to willful failure to appear in court or comply with court orders. Additionally, individuals must receive credit counseling from an approved agency within 180 days before filing, unless an emergency situation exists or approved agencies are insufficiently available. The debtor must provide various financial documents and complete the required forms when filing for Chapter 13.
How Chapter 13 Works
A Chapter 13 case commences by filing a petition with the bankruptcy court where the debtor resides. The debtor must also submit schedules of assets and liabilities, current income and expenditures, executory contracts, and a statement of financial affairs. The court charges filing and administrative fees, which may be paid in installments. Within 30 days of filing, the debtor must start making plan payments to the trustee. Filing for Chapter 13 triggers an automatic stay that halts most collection actions against the debtor and their property. Creditors are notified of the bankruptcy case. A meeting of creditors is held between 21 and 50 days after the filing, where the trustee evaluates the case and creditors can ask questions. At this meeting, the debtor must answer questions about their financial affairs and proposed plan terms. Within 45 days of the meeting, the court holds a confirmation hearing to determine if the plan is feasible and meets legal requirements. Creditors have the opportunity to object to confirmation. If the plan is confirmed, the trustee distributes funds to creditors. The court may grant a hardship discharge if the debtor is unable to complete the plan due to circumstances beyond their control.
Making the Plan Work
Once the court confirms the plan, the debtor must make regular payments to the trustee, either directly or through payroll deduction. The debtor must adhere to the budget outlined in the plan and consult with the trustee before incurring new debt. Failure to make payments may result in dismissal or conversion to Chapter 7 bankruptcy. The plan binds both the debtor and creditors, and the debtor may be responsible for certain debts that are not fully paid by the plan.
The Chapter 13 Discharge
The discharge under Chapter 13 releases the debtor from all debts provided for by the plan, with some exceptions. Creditors included in the plan cannot pursue legal action to collect the discharged obligations. However, certain debts, including taxes, alimony, child support, and certain loans, are not discharged. Debts resulting from fraud, embezzlement, or willful injury are also generally non-dischargeable. The debtor must complete all payments under the plan, meet specific requirements, and attend a financial management course to receive a discharge.
Chapter 13 bankruptcy provides individuals with regular income the opportunity to repay their debts over three to five years. It offers advantages such as saving homes from foreclosure, rescheduling secured debts, and protecting co-signers. Understanding the eligibility requirements, the process involved, and fulfilling obligations under the plan are crucial for achieving financial relief through Chapter 13.
For more information about Chapter 13 bankruptcy, contact Garrity Traina, your trusted legal professionals specializing in bankruptcy law.