Chapter 13 Overview
Chapter 13, is a repayment plan designed for an individual with a regular source of income that otherwise does not qualify for or want a Chapter 7. Often the payment plan is considerably lower than if wages were garnished or regular credit card payments were made. Chapter 13 may be preferable to Chapter 7 because it enables the debtor to keep a desirable asset, such as a house, and because it allows the debtor to propose a “plan” to repay creditors, sometimes as low as 10% of the debt, over time – usually 3 – 5 years.
Chapter 13 is also used by consumer debtors who do not qualify for Chapter 7 relief under the means test. At a confirmation hearing, the court either approves or disapproves the debtor’s repayment plan, depending on whether it meets the Bankruptcy Code’s requirements for confirmation. Chapter 13 is very different from Chapter 7 since the Chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan (3 – 5 years).
Unlike Chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under Chapter 13 than the discharge under Chapter 7.
Chapter 13 Background
A Chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under Chapter 13, debtors propose a repayment plan, making installments to creditors over three to five years. If the debtor’s “current monthly income” is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years.
What is Current Monthly Income?
“Current Monthly Income” means the average monthly income received over the six calendar months before filing the bankruptcy case, including regular contributions to household expenses from non-debtors and including income from the debtor’s spouse if the petition is a joint petition. It does not include social security income or certain payments made because the debtor is the victim of certain crimes. During this time the law forbids creditors from starting or continuing collection efforts.
Advantages of Chapter 13
Chapter 13 may offer individuals a number of advantages over liquidation under Chapter 7. Perhaps most significantly, Chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this Chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the Chapter 13 plan on time. Another advantage of Chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the Chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that may protect co-signers protects and other third parties who are liable with the debtor on “consumer debts.” Finally, Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a Chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under Chapter 13 protection.
Chapter 13 Eligibility
?Any individual, even if self-employed or operating an unincorporated business, is eligible for Chapter 13 relief as long as the individual’s unsecured debts are less than $307,675 and secured debts are less than $922,975. These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a Chapter 13 debtor. An individual cannot file under Chapter 13 or any other Chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. In addition, no individual may be a debtor under Chapter 13 or any Chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency.