Understanding How Chapter 13 Works
Chapter 13 bankruptcy, also known as a wage earner’s plan, is a legal process that allows individuals with regular income to restructure their debts and repay them over a period of three to five years. This chapter of the Bankruptcy Code provides individuals the opportunity to create a repayment plan to pay off all or part of their debts while retaining their assets.
Advantages of Chapter 13
Chapter 13 offers several advantages over liquidation under chapter 7. One significant benefit is the ability to save homes from foreclosure by stopping foreclosure proceedings and catching up on delinquent mortgage payments over time. Additionally, individuals can reschedule secured debts and extend them over the life of the chapter 13 plan, potentially reducing payments. Chapter 13 also provides protection for co-signers on consumer debts and allows debtors to make consolidated payments to a trustee who then distributes the funds to creditors, eliminating direct contact with creditors.
Chapter 13 Eligibility
Any individual, including self-employed individuals or those operating unincorporated businesses, may be eligible for chapter 13 relief if their total secured and unsecured debts are less than $2,750,000 at the time of filing. There are specific requirements regarding prior bankruptcy filings, credit counseling, and debt limits that individuals must meet to qualify for chapter 13.
How Chapter 13 Works
A chapter 13 case begins with the filing of a petition with the bankruptcy court, along with various schedules and financial information. The debtor must also pay filing and administrative fees, which can sometimes be paid in installments. The debtor must compile detailed information about creditors, income, expenses, and assets to complete the necessary forms.
The Chapter 13 Plan and Confirmation Hearing
Once the petition is filed, the debtor must submit a repayment plan for court approval within a specified timeframe. The plan outlines fixed payments to the trustee, who then distributes the funds to creditors according to the terms of the plan. The plan must address priority, secured, and unsecured claims, ensuring that creditors are paid according to bankruptcy laws.
Making the Plan Work
After the plan is confirmed, the debtor must make regular payments to the trustee, either directly or through payroll deductions. It is essential to adhere to the plan and budget carefully to ensure successful completion. Failure to make payments or incur new debt without trustee approval can result in dismissal or conversion of the case.
The Chapter 13 Discharge
Upon completion of all payments under the chapter 13 plan, the debtor is entitled to a discharge of debts outlined in the plan. Certain debts, such as taxes, alimony, child support, and specific loans, may not be discharged. Debtors must also complete a financial management course as part of the discharge requirements.
Frequently Asked Questions (FAQs)
1. Who is eligible for chapter 13 bankruptcy?
Individuals with regular income and total debts below $2,750,000 may be eligible for chapter 13 relief, subject to specific requirements regarding prior bankruptcies and credit counseling.
2. How long does a chapter 13 repayment plan last?
A chapter 13 repayment plan typically lasts between three to five years, depending on the debtor’s income and the court’s approval.
3. What happens if a debtor fails to make plan payments?
Failure to make plan payments under chapter 13 can result in dismissal or conversion of the case to a chapter 7 liquidation, where assets may be sold to repay creditors.
4. Can chapter 13 help save a home from foreclosure?
Yes, chapter 13 can stop foreclosure proceedings and allow debtors to catch up on delinquent mortgage payments over time, potentially saving their homes.
5. What debts are not dischargeable in chapter 13?
Debts such as alimony, child support, certain taxes, and debts arising from criminal activities are typically not dischargeable in chapter 13 bankruptcy.
6. What is a hardship discharge in chapter 13?
A hardship discharge may be granted if a debtor faces circumstances beyond their control that prevent them from completing the repayment plan, provided certain conditions are met, and the debts are dischargeable.