Most people think bankruptcy is all about liquidating assets to pay back your debts before the remaining balances are discharged. However, there are other types of bankruptcy besides Chapter 7 liquidation.
Chapter 13 is about creating a court-ordered plan to pay back your debts. With Chapter 13 you have at least some income, but there’s no reasonable way that you’re going to pay back everything you owe.
- Chapter 13 bankruptcy allows you to repay some of what you owe through a court-ordered repayment plan. The repayment plan usually lasts between three and five years.
- The filing fee for Chapter 13 bankruptcy is $335, but if your income is low enough, you could file to waive this fee.
- When you officially file, an automatic stay is placed on your accounts. This means collectors can no longer call you directly. It also stops wage garnishment and foreclosure actions.
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The challenges of filing for Chapter 13
While you might think it would be easier to get creditors to agree to an adjusted payment schedule than it would be to get them to discharge your debts, the opposite is usually the case.
Many times, it’s better from the lender’s perspective to have your filing converted to a Chapter 7, so assets like your home can be liquidated to pay off your debts immediately. This is often better for the lender because they get any money quickly and get out, instead of waiting around for the low payments the court will assign with Chapter 13.
Why Chapter 13 may be better for you
A Chapter 7 bankruptcy is often better for the lender, but what about for you? Not surprisingly, it’s Chapter 13.
It’s usually the better option, if…
- You have significant personal assets and don’t want to lose them in liquidation. A prime example is if you have a large amount of equity built up in your home. On the other hand, if you’re upside down on your mortgage because of a downturn in the market, you may not actually care if that asset gets liquidated.
- You have a steady income, but unsecured debt payments are destroying your monthly finances. If all of your money problems are being caused by too much debt and delinquent credit card accounts, adjusting your payment schedule can put you in a better place without risking your assets.
Start the filing process, so you can get the fresh start you need.
Requirements for Chapter 13 filing
Chapter 13 bankruptcy filings have some fairly strict requirements that you will need to meet in order to get the judgment you want.
- Your total unsecured debt must be less than $419,275.
- Your total secured debts must not total more than $1,257,850.
- You must have been a resident of the state where you wish to file for at least 2 years.
- You must complete a pre-filing credit counseling session with a court-approved certified credit counselor within 180 days before your filing date.
There are a few other requirements specific to certain situations and you may also have specific requirements for your state. It’s recommended you hire a bankruptcy attorney to make sure everything is going according to plan.
What to expect when you file Chapter 13
Once you complete your pre-filing credit counseling session and file formally, an “automatic stay” is issued by the courts.
This prevents creditors from taking any action against you to collect on your debts — in most cases, they’re even prevented from calling you anymore, so no more collector calls. All lawsuits and wage garnishments are stopped, too.
The bankruptcy clerk sends notices of filing out to all creditors and lenders listed in your filing (you must provide any contact information you have). A means test is conducted in accordance with the guidelines set out in the BAPCPA. This determines you are eligible to make a Chapter 13 filing.
More advantages with Chapter 13
Besides getting the relief of not having to dodge phone calls and hide from your creditors, you can get some distinct benefits with a Chapter 13 filing. They don’t make filing good, but they at least help you make the best of a bad situation.
- You can save your home from foreclosure. The automatic stay applies to foreclosure proceedings too, so the foreclosure process is stopped when the automatic stay goes into effect (and stays in place until you complete your payment schedule). This gives you more time to save your home and once your judgment is in place, you may have more money available to work something out with the lender.
- It freezes interest/penalties on taxes. If you’ve fallen behind with your taxes, the IRS has some pretty harsh penalties that apply to what you owe. Filing stops any further penalties from being added.
Why you need help filing
If you need to save your home or have other assets that you want to make sure you protect, then you need to have some help when you file for Chapter 13 bankruptcy. Even if you decide to go through the process alone, you’ll still be required to take the credit counseling course before you can file.
Steps of filing Chapter 13 bankruptcy
There are more steps than just 9, but these are the basic ones that will help you understand the process:
Step 1: Paperwork
You probably could have guessed this, but filing for bankruptcy includes a whole lot of paperwork.
You will fill out forms that describe your financial situation and your bankruptcy case, your secured and unsecured debts, and more.
Consider consulting an attorney for this part. It’s essential to get all of this information correct.
Step 2: Counseling
Everyone who files for Chapter 13 bankruptcy must participate in a pre-bankruptcy counseling course. You will receive a certificate of completion, which you must include with your paperwork when you file.
Step 3: Filing
With the paperwork and counseling completed, you’re ready to file. The filing fee is $335, but if you can’t afford it, you can file a petition to have it waived.
After you officially file, the automatic stay starts. This means creditors can no longer come after you for the debt you owe. Everything must be handled through the courts.
Step 4: Trustee
The court will assign a trustee to your bankruptcy case who will keep track of your progress. You will receive a packet that explains Chapter 13 bankruptcy and details important dates for your case.
Step 5: Meet with creditors
If any of your creditors object to the payment plan you filed, they have until 25 days before the confirmation hearing to file against it.
Within 40 days after you filed for bankruptcy, you must meet with your creditors to discuss your payment plan. You will be accompanied by your trustee. For this step, you need to bring proof that you filed your tax returns for the last four years and any other info your trustee asks for.
If you need to change your payment plan to meet the needs of creditors, you will file a modified plan.
Step 6: Confirmation hearing
You and your attorney will go to a confirmation hearing. During this hearing, the court will decide whether to approve your plan.
Any objections from your trustee or your creditors will be addressed. The confirmation must take place between 20 and 45 days after you meet with your creditors.
Step 7: Payment
Once you’re cleared to file, the judge arranges a court-ordered payment schedule to pay back your debts. You may not have to pay back all of your debts and/or may only be required to pay back a portion of each debt.
How long is a Chapter 13 repayment schedule?
You’ll usually have about 3-5 years of payments to make. You pay the money to the trustee and they distribute payments to your creditors. Your creditors aren’t allowed to contact you for additional money. In fact, you’re pretty much assured you won’t talk to a creditor or collector for the entire time it takes to complete your payment schedule.
Step 8: Education course
Prior to your final monthly payment, you must take another debtor education course. This course will cover personal financial management.
When you complete the course, you’ll file the certificate of completion with the court.
Step 9: Discharge
After you complete both the course and your final payment, the court will grant you a discharge. You’ll either have a short court hearing or receive notification in the mail.
Need help starting the filing process? We’re here so you can get the fresh start you need.
Article last modified on August 7, 2020. Published by Debt.com, LLC