Most people think bankruptcy is all about liquidating assets to pay back your debts before the remaining balances are discharged. However, a Chapter 13 bankruptcy 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 you can pay back everything you owe. It can also help stop impending collection actions, including foreclosure.
- 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 $310, but if your income is low enough, you could file to waive this fee.
- Attorney fees are often rolled into the monthly repayment plan, so you don’t need a big investment upfront.
- 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.
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.
A Chapter 13 bankruptcy can provide some protection for your assets, particularly for secured assets like your mortgage. However, if you fail to make your regular payments, your mortgage lender can simply petition the court to release the home from bankruptcy protection. If they do, then the foreclosure can take place anyway.
The biggest challenge of a Chapter 13 bankruptcy is the length of time it takes to complete. Making five years’ worth of payments can be challenging. In that amount of time, unexpected situations can result in you not being able to afford the payments. A medical issue, job loss, or any other issue beyond your control can arise.
A report by the Federal Reserve Bank of Philadelphia found that only one-third of Chapter 13 bankruptcy cases result in discharge. This figure comes from multiple studies in multiple districts throughout the U.S. The same study found that 8 percent of Chapter 13 case filings converted to Chapter 7. In some U.S. court districts, the failure and conversion rates are much higher.
Given these high rates of failure and conversion, a Chapter 13 repayment plan should not be entered into lightly. It’s important to consult with a qualified bankruptcy attorney to make sure it’s the best choice for your finances before you agree to a court-ordered repayment plan.
Talk to an expert to ensure that a Chapter 13 filing is your best option for relief.
When Chapter 13 may be the best option
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 to liquidation, foreclosure, or repossession. 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.
- You want protection from your creditors, but make too much money to file a Chapter 7 bankruptcy
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 bankruptcy counseling session with a court-approved certified 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-bankruptcy 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). If you want to keep your home, you will have to make your full monthly mortgage payment. However, you can pay off past-due payments over time in the plan.
- 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.
- It protects co-signers if they guaranteed a debt you owe. You can affirm a debt and repay it through your Chapter 13 payment plan, which will save your cosigners from facing collection actions.
- It acts like a consolidation program. You make one monthly payment to the bankruptcy trustee and it is divided out to your creditors.
Start the filing process, so you can get the fresh start you need.
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.
Filing bankruptcy is a legal process. Unless you know what you are doing and have experience with the process, you can inadvertently make serious mistakes in your filing documents. There is no substitute for seeking the advice and representation of an experienced bankruptcy attorney to file for Chapter 13 protection
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. These include:
- Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period (Official Form 122C-1)
- Chapter 13 Calculation of Your Disposable Income (Official Form 122C-2)
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 $310, 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, the trustee will schedule a meeting of creditors. You will be accompanied by your trustee; creditors are not required to attend and many will not show. You will 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?
There are two “commitment periods” for Chapter 13 – three years or five years. If your income is above the median income in your state, your payment plan must be for five years. If your income falls below that threshold, then your plan will be three years. While some people qualify for three, in most cases, you should expect to be in repayment for five years.
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.
Can you buy a car during a chapter Chapter 13 repayment plan?
Yes, and as long as you have court approval you can even get an auto loan.
As Chris Barski from Barski Law Firm explains, “Vehicle financing is still available with court approval, although interest rates are not favorable.”
If you need to get a car during your repayment plan, the best solution would be to pay for a low-cost vehicle in cash. Be aware that the higher interest rates you would face when financing during your bankruptcy would increase both the total cost of the vehicle, as well as the monthly payments.
Can you rent an apartment during a Chapter 13 repayment plan?
Yes. Most landlords will perform a credit check during your rental application. They will see the bankruptcy listed. However, this will not immediately prevent you from renting. You should be prepared to explain your situation and be able to prove that you can afford the property.
“Filing for bankruptcy makes it more of a challenge to rent, but not impossible,” says Leslie Tayne of Tayne Law Group. “Individual landlords are a safer bet and might be more willing to work with individuals that have filed for bankruptcy. You might need a cosigner or a bigger security deposit to secure housing with a bankruptcy ongoing.”
Can you receive a tax refund with an ongoing Chapter 13 bankruptcy?
In most cases, a tax refund will be viewed as disposable income. Thus, it must be turned over to the trustee. In rare cases, you may be able to show that your tax refund is necessary to cover living expenses, in which case, the court will excuse the tax refund and allow you to keep it. Covering a necessary unexpected expense that has arisen, such as a car or home repair, could count as a cause for the court to excuse a specific tax refund.