What is Chapter 13 Bankruptcy?
When a debtor files for Chapter 13 bankruptcy, they create a repayment plan.
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Chapter 13 is one of the most common types of bankruptcy filed today by individuals trying to dig themselves out from under their financial burdens.
Filing for Chapter 13 bankruptcy gives debtors the opportunity to retain all their assets while paying off debts via a court-monitored payment plan. When a debtor files for Chapter 13 bankruptcy, they create a repayment plan that provides specifics on which debts will be paid in full, which will be partially paid and how long it will take. Debtors who are still earning a regular income are the ones who most often file for Chapter 13, which is why it is also known as the wage earners plan.
The main benefit to Chapter 13 bankruptcy is that it avoids the debtor's non-exempt assets, such as family heirlooms, collections of stamps, coins and baseball cards, or a second car or home, from being collected by the court and sold, with the proceeds being used to pay off a portion of the debt. In addition, filing for Chapter 13 bankruptcy halts any wage garnishment, vehicle repossessions and home foreclosures. Another advantage is that it does not appear on an individual's credit report as long as other types of bankruptcies. This gives the debtor a quicker opportunity to repair their credit. The main drawback to filing for Chapter 13 is that if the debtor misses even a single payment, the court can dismiss the case, leaving them buried under a financial mess.
Not everyone is eligible to file for Chapter 13 bankruptcy, however. Those who don't earn a regular income, or whose annual income is too low, are often denied the opportunity to file for Chapter 13 by the federal bankruptcy court. Individuals with too much debt also are ineligible. Specifically, secured debts – those that are backed by some sort of collateral, such as a home or car loan – cannot exceed $1,010,650. Unsecured debts – those not backed by any type of collateral, like a credit card bill – cannot be more than $336,900. These amounts do change periodically based on the Consumer Price Index.
Throughout Chapter 13 proceedings, creditors are forbidden from starting or continuing collection efforts. Businesses are not eligible to file for Chapter 13 bankruptcy, but individuals who run their business as a sole proprietor can file for Chapter 13 bankruptcy as an individual and include the business-related debts for which they are liable.
Chapter 13 vs. Chapter 7
The biggest difference between Chapter 13 and Chapter 7 bankruptcies is the payment plan. While debtors formulate a repayment plan, generally three to five years in length, when filing for Chapter 13, no such plan exists under Chapter 7 regulations. In Chapter 7, certain debts are eliminated altogether.
A second major difference is the length of time it takes to complete the process. The Chapter 13 process is not finished until all the payments to the creditors are made, which can take as long as five years. Chapter 7 bankruptcy, however, is a much shorter process, often completed within four to six months.
Additionally, debtors who file for Chapter 13 bankruptcy don't risk losing any personal assets, since they are using their income to fulfill their payment plan obligations. Under Chapter 7 rules, debtors can have their nonexempt assets liquidated and sold, with the proceeds going to pay off some of the creditors.
Chapter 13 vs. Chapter 11
Eligibility is the key difference between filing for Chapter 11 and 13 bankruptcies. While there are no restrictions on the amount of debt an individual can have when filing for Chapter 11 bankruptcy, there are limits for both secured and unsecured debts when filing for Chapter 13. In addition, businesses – specifically corporations and limited liability companies – are ineligible from filing for Chapter 13 bankruptcy.
Chapter 13 and 11 bankruptcies also vary in how the reorganization plans are approved by the creditors. While Chapter 13 plans are automatically approved as long as they meet the required legal standards, Chapter 11 plans must be specifically approved by at least two-thirds of the creditors who are owed money. The length of the repayment plan can also differ in that there are no circumstances for which a Chapter 13 payment plan be extended longer than five years, but there are such circumstances under Chapter 11 proceedings.
Filing for Chapter 13 bankruptcy
As with other types of bankruptcy, a debtor must complete a credit counseling class within 180 days before filing for Chapter 13 bankruptcy. Once they have completed their financial education training, the debtor can officially file their bankruptcy petition in Bankruptcy Court, which is a section of the U.S. Court System.
In addition to the Chapter 13 petition, which can be found on the U.S. Court System's website, the debtor must file with the court a list of assets and liabilities, a schedule of current income and expenditures and a statement of financial affairs. Once the case has been filed, the debtor receives an "automatic stay," which prohibits creditors from trying to collect their money.
The debtor must also provide the case's trustee — the impartial individual who oversees the case — a copy of their most recent tax return, as well as any tax returns filed during the case. In addition to their financial documents, the debtor must file a repayment plan within two weeks of the petition's filing. According to the U.S. Courts, the debtor must provide for payments of fixed amounts on a regular basis – typically biweekly or monthly – to the trustee, who then distributes the funds to creditors according to the terms of the plan.
Within 60 days of filing, the debtor will appear at a creditor's meeting, during which they must answer questions about their financial affairs and the proposed plan. No longer than 45 days after the creditors meeting, the case's judge will rule on whether or not to approve the plan. The case is not officially complete until all terms of the repayment plan have been completed. While not required by law, the U.S. Courts highly recommends debtors use the services of an attorney throughout all Chapter 13 proceedings.