Chapter 13 Bankruptcy: What You Need To Know

Are you considering filing for Chapter 13 Bankruptcy because debts have become overwhelming? So many people are in the same situation today and we have created this article to help you. Chapter 13 bankruptcy is available to individuals and business owners. It is known as a “wage earner’s plan” or “reorganization bankruptcy.” Unlike Chapter 7 bankruptcy, which involves the liquidation of assets to pay off debts, Chapter 13 allows debtors to create a repayment plan to reorganize their debts over a period of three to five years. We have done the research on Chapter 13 Bankruptcy. If you would like to explore an alternative option and go over your financial situation contact us today for a free no-obligation consultation.

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How Chapter 13 bankruptcy works

Here’s how Chapter 13 bankruptcy generally works:

Step 1- Filing the Petition– To begin the Chapter 13 bankruptcy process, the debtor must file a petition with the bankruptcy court in their jurisdiction.

Step 2- Repayment Plan– Along with the petition, the debtor must also submit a proposed repayment plan. This plan outlines how they intend to repay their debts over the designated period (usually three to five years). The plan must demonstrate that the debtor has enough regular income to make the proposed payments.

Step 3- Automatic Stay – Once the petition is filed, an automatic stay goes into effect. This prevents creditors from taking any collection actions against the debtor, such as foreclosure, repossession, or wage garnishment.

Step 4- Confirmation Hearing– After filing, there will be a confirmation hearing where the court reviews the repayment plan. Creditors have the opportunity to object to the plan during this hearing.

Step 5- Plan Approval If the court approves the proposed plan and no objections are sustained, the debtor will make regular payments to a bankruptcy trustee appointed by the court. The trustee is responsible for distributing the funds to the creditors as outlined in the plan.

Step 6- Repayment Period– The debtor will continue making payments to the trustee for the specified duration of the plan (usually three to five years).

Step 7- Debt Discharge– If the debtor successfully completes the repayment plan, any remaining eligible debts covered by the plan may be discharged. This means the debtor is no longer legally obligated to repay those debts, even if they were not fully paid off during the repayment period.

Why someone would file for Chapter 13

People may choose to file for Chapter 13 bankruptcy for various reasons, depending on their financial situation and goals. Some of the common reasons why someone would file for Chapter 13 bankruptcy include:

• Avoiding Foreclosure: One of the primary reasons for filing Chapter 13 is to prevent a foreclosure on their home. The automatic stay that comes into effect upon filing halts the foreclosure process, allowing the debtor to catch up on missed mortgage payments over the repayment period.
• Repayment of Priority Debts: Chapter 13 allows debtors to prioritize certain debts, such as tax obligations and child support arrears, which must be paid in full during the repayment plan.
• Protecting Non-Exempt Assets: In Chapter 7 bankruptcy, non-exempt assets may be sold to repay creditors. Chapter 13 can be a better option for individuals with significant non-exempt assets they wish to retain, as they can keep their property and repay their debts through the repayment plan.
• Higher Income: Chapter 13 is often suitable for individuals with a stable income that exceeds the Chapter 7 means test threshold. They can use their income to fund the repayment plan and gradually pay off their debts.
• Co-Debtor Protection: If a debtor has a co-signer on certain debts, filing for Chapter 13 can protect the co-signer from collection actions while the repayment plan is in effect.
• Cure Defaulted Loans: Chapter 13 allows debtors to catch up on past-due payments for secured debts like car loans or mortgage arrears over time, while still keeping the property.
• Debt Discharge: While not all debts are dischargeable in Chapter 13, some unsecured debts (like credit card debt and medical bills) can be discharged at the end of the repayment plan if not fully paid off.
• Irregular Income: For individuals with irregular income, Chapter 13 provides a structured repayment plan, making it easier to manage their debts.

Eligibility requirements for Chapter 13

It’s important to note that not everyone is eligible for Chapter 13 bankruptcy. To qualify, the debtor must have a steady source of income sufficient to fund the repayment plan, and their unsecured and secured debts must fall within certain limits set by the bankruptcy code. Additionally, it’s essential to understand the potential consequences and long-term impact of filing for bankruptcy, so consulting with a bankruptcy attorney is highly recommended to assess the individual’s unique financial situation and explore the most appropriate options. If one is not eligible for bankruptcy it is important to explore other options of debt relief.

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Who should file for Chapter 13

Chapter 13 bankruptcy is a viable option for individuals who meet specific criteria and have specific financial circumstances. While Chapter 13 can be beneficial for some, it may not be the best choice for everyone. Here are some situations where someone should consider filing for Chapter 13 bankruptcy:

• Steady Income: Chapter 13 is suitable for individuals with a regular source of income. The repayment plan relies on the debtor’s ability to make consistent monthly payments to the bankruptcy trustee, who then distributes the funds to creditors. Without a stable income, it would be challenging to fulfill the requirements of the repayment plan.
• Foreclosure or Repossession Threat: If you are facing foreclosure on your home or repossession of your vehicle due to delinquent payments, Chapter 13 can provide a way to catch up on the missed payments and keep your property. The automatic stay that goes into effect upon filing can temporarily halt foreclosure or repossession actions.
• Priority Debts: Chapter 13 is appropriate for individuals who have priority debts, such as tax debts or child support arrears. These types of debts must be paid in full during the repayment plan, and Chapter 13 provides a structured way to do so.
• Desire to Keep Non-Exempt Assets: If you have valuable non-exempt assets that you want to protect from being sold in Chapter 7 bankruptcy, Chapter 13 can allow you to retain those assets while still repaying your creditors through the repayment plan.
• Co-Signer Protection: If you have debts with a co-signer, filing for Chapter 13 can protect the co-signer from being pursued by creditors while the repayment plan is in effect.
• Failed Chapter 7 Means Test: If your income exceeds the Chapter 7 means test threshold or you don’t pass the means test, Chapter 13 may be a suitable alternative for debt relief.
• Non-Dischargeable Debts: If you have certain debts that are non-dischargeable in Chapter 7 (e.g., certain tax debts, student loans), Chapter 13 provides a way to repay those debts over time without the threat of immediate collection actions.

How to file for Chapter 13

Filing for Chapter 13 bankruptcy involves a detailed legal process. It’s essential to follow the correct steps to ensure a smooth and successful bankruptcy case. Here’s a general outline of how to file for Chapter 13:

Step 1- Consult with a Bankruptcy Attorney– Before proceeding, it’s crucial to consult with an experienced bankruptcy attorney. They can help you understand if Chapter 13 is the right option for your situation, guide you through the process, and ensure you meet all the requirements.

Step 2- Credit Counseling– Before filing for bankruptcy, you must complete a credit counseling course from a court-approved agency. The course aims to evaluate your financial situation and explore alternatives to bankruptcy.

Step 3- Gather Financial Information– Collect all your financial documents, including income records, a list of assets and liabilities, monthly living expenses, tax returns, deeds, titles, and other relevant financial records.

Step 4- Complete Bankruptcy Forms– With the assistance of your attorney, you’ll need to complete the required bankruptcy forms. These forms will detail your financial situation, debts, income, expenses, assets, and other relevant information. The official bankruptcy forms can be obtained from the bankruptcy court’s website or local court office.

Step 5- Repayment Plan– Work with your attorney to create a proposed repayment plan. The plan should outline how you intend to repay your debts over the three to five-year period, as required under Chapter 13. The plan must be feasible and meet the requirements of the bankruptcy code.

Step 6- File the Petition– Once you’ve completed the necessary forms and prepared the repayment plan, your attorney will help you file the Chapter 13 petition with the bankruptcy court in your jurisdiction. Along with the petition, you’ll need to submit the repayment plan and other required documents.

Step 7- Automatic Stay– Upon filing, an automatic stay goes into effect, which stops creditors from pursuing collection actions against you. This provides relief and protection while the bankruptcy case is pending.

Step 8- Attend the Creditors Meeting– After filing, you’ll attend a meeting of creditors (also known as a 341 meeting). During this meeting, you, your attorney, and the bankruptcy trustee will discuss your financial situation and the proposed repayment plan. Creditors may also attend the meeting and ask questions.

Step 9- Plan Confirmation– The bankruptcy court will hold a hearing to review and confirm your proposed repayment plan. If the court approves the plan, you can begin making payments to the bankruptcy trustee as outlined in the plan.

Step 10- Complete the Repayment Plan– Over the next three to five years, you must adhere to the repayment plan and make regular payments to the trustee. The trustee will distribute the funds to your creditors according to the plan.

Step 11- Debt Discharge– Once you successfully complete the repayment plan, any remaining eligible debts covered by the plan may be discharged, providing you with debt relief.

An Alternative to Chapter 13

Debt settlement is an alternative to filing for Chapter 13 bankruptcy that can be considered by individuals who are struggling with overwhelming debt. Debt settlement is a negotiation process where you work with your creditors or a debt settlement company to reach an agreement to pay off your debts for less than the total amount owed. It’s essential to understand the key features and considerations of debt settlement as compared to Chapter 13 bankruptcy:

• Approach: In debt settlement, you negotiate with individual creditors to settle your debts for a reduced amount, whereas, in Chapter 13 bankruptcy, you work through a court-approved repayment plan to pay off a portion of your debts over time.
• Debt Reduction: In debt settlement, creditors may agree to accept a lump-sum payment or a series of negotiated payments that are less than the total amount you owe. In Chapter 13 bankruptcy, the amount you repay is generally determined based on your income and the value of your assets.
• Legal Process: Debt settlement is typically not a formal legal process, although it’s essential to have a written agreement with your creditors to ensure they uphold their end of the settlement. In contrast, Chapter 13 bankruptcy is a legal process filed in bankruptcy court, with specific rules and protections under federal law.
• Eligibility: Debt settlement is generally available to anyone with delinquent debts, while Chapter 13 bankruptcy has specific eligibility requirements, including having a steady income to support the repayment plan.

Is debt relief a good option for you? Explore the Pros and Cons of Debt Settlement before making a decision.

Conclusion

Looking for a bankruptcy alternative? CuraDebt has been helping individuals and small businesses for over 22 years nationwide and is one of the oldest and most experienced in the debt relief industry. As of May 2023 CuraDebt received a score of 5 out of 5 on CustomerLobby for a total of 1179 customer views. CuraDebt is an Accredited Member of the American Fair Credit Council. Contact us toll free today for a free consultation. 1-877-850-3328. Not only do we handle personal debt relief, we also offer business debt relief and tax debt relief.