Also known as the wage earner’s plan, chapter 13 is ideal for people with a regular income. These debtors can repay their debts through a repayment plan where their creditors are paid through regular monthly installments over three to five years. The duration of the plan depends on the debtor’s current monthly income. If it is more than the state median, the plan is for five years, else it concludes in three years. There are several advantages of opting for chapter 13. Since it allows you to catch up on past due payments, you can prevent foreclosure on your property. It also protects co-debtors from being pursued by creditors. Moreover, the consolidated payments are made to the trustee who distributes the funds among the creditors depending on their priority. Thus, you are not required to deal with creditors for the duration of your plan.
Who is eligible for chapter 13?
To be eligible for chapter 13, the unsecured debt must be less than $394,725 and secured debts must be less than $1,184,200. While an unincorporated business can file for this bankruptcy chapter, corporations or partnerships cannot file under this chapter. Additionally, if a prior bankruptcy petition was dismissed within 180 days due to willful failure to appear before the court by the debtor, a chapter 13 bankruptcy petition cannot be filed. Moreover, if the filer has not received credit counseling from an approved credit counseling agency within 180 days, they cannot file or chapter 13. The debt management plan developed in the counseling session must be filed with the court.
How does chapter 13 work?
The bankruptcy case starts once the petition is filed. The debtor needs to file a list of their assets and liabilities, income and expenditure, contracts and unexpired lease, financial statements, credit counseling certificate, debt repayment plan, pay receipts, monthly income, and an expected increase in income or expenditure, and a copy of tax return. A case filing fee of $235 and a $75 miscellaneous administrative fee need to be submitted. It can be paid in four installments if a lump sum cannot be paid. The debtor also needs to file a list of creditors, the amount and nature of the claim, the source, frequency, and amount of their income, a list of debtor’s property, and details about monthly expenses.
After a petition for chapter 13 is filed, an impartial trustee is appointed to handle the case. They are responsible for evaluating the assets and distributing the payment to creditors. Filing for bankruptcy puts an automatic stay in place which prevents all collection actions from taking place. Chapter 13 also protects co-debtors from being harassed by the creditors. A meeting of creditors is held within 1-2 months of filing the petition where creditors can state their claim. Unsecured creditors should file their claim in court within 90 days of this meeting to ensure they are paid. The repayment plan must be filed within 14 days of petition filing for court approval and payments should start within 30 days of filing, irrespective of approval. Within 45 days, the confirmation hearing takes place to approve or change the repayment plan.
Getting a discharge
The debts are segregated into priority, secured, and unsecured debts, with the former two being paid in full, and the latter paid as much as possible. Priority debts include taxes, alimony, child support, educational loans, etc. Secured debts are debts against which the creditor has collateral, while unsecured debts include medical bills, credit card debt, personal loans, etc. Once the debts are cleared, and the debtor has completed the approved financial management course, they are granted a discharge which frees them of all debts. Chapter 13 allows discharging debts due to wilful injury to property, those incurred to pay for non-dischargeable taxes, and debts incurred due to divorce proceedings. A hardship discharge is also available to debtors if unforeseen circumstances make it difficult for them to complete the repayment plan.