Chapter 13 is a form of personal bankruptcy that allows people to obtain protection from creditors while undergoing a financial reorganization supervised by a federal bankruptcy court. It’s the most commonly available option for those with steady incomes and who did not pass the chapter 7 bankruptcy means test.
It differs from Chapter 7 in that it requires a 5 year payment plan for some or all debt to be approved by the court and carried out successfully before any remaining debt is discharged.
Another difference between chapter 13 and chapter 7 is that with chapter 13 you get to keep most, and possibly all, of your property. Chapter 7 is known as a liquidation bankruptcy because you usually have to surrender most of your property to be distributed to your creditors to help pay for some of your debt.
- Chapter 13 and Foreclosure Defense
- How does Chapter 13 work?
- How is the plan of reorganization created and approved?
- What is the filing fee for chapter 13?
- Is there a means test for Chapter 13?
- What other types of bankruptcy are there?
- How does filing a Chapter 13 petition keep creditors away?
- What is creditor preferencing?
- How are payments made?
- What is the role of the court trustee during my bankruptcy?
- What happens if I stop making payments?
- What happens if my income increases during my chapter 13 case?
- What happens if my income decreases during my chapter 13 case?
- What is required of me during my chapter 13 case?
- What debts are not discharged in a chapter 13 bankruptcy?
- What information is needed to file a Chapter 13 Petition?
- Should I use a lawyer for filing chapter 13 bankruptcy?
If you have a mortgage and are facing foreclosure, chapter 13 is a powerful remedy. Filing can temporarily freeze the foreclosure process in its tracks while you’re given time to present your plan of reorganization. As long as you remain current on your future mortgage payments, chapter 13 can help you catch up on missed payments and sometimes reorganize your mortgage entirely to help you keep your house and afford your payments moving forward.
Chapter 13 is for those with less than $336,900 in unsecured debt and/or less than $1,010,650 in secured debt. If you owe more than these amounts, you should look into chapter 11 with your attorney.
In a Chapter 13 filing, you file a set of documents known as the petition, along with various schedules, a statement of affairs and other forms with the bankruptcy court. These documents are reviewed by a court trustee and by some or all of your other creditors.
Your filing also includes a plan of reorganization, which is a 5 year plan devised to apply all disposable income to the payment of all, or a portion of, the debt. This plan is approved by a trustee of the court who continues to monitor the progress of the plan through its entirety.
Your disposable income is calculated through by applying a series of allowed expenses for necessities to your average income from the past six months. This is probably one of the most complex parts of the chapter 13 bankruptcy process.
At the end of the plan period, the remaining debt is discharged, excluding such debts which are undischargable by bankruptcy.
With the aid of your attorney, you will create a repayment plan that applies your disposable income to the payment of your debts over what is typically a five year period. This plan is reviewed by the bankruptcy court, along with your creditors, and is approved by a judge.
Depending on the amount of disposable income available, some or all of the debt may be paid off during this period.
There is a $274 filing fee for chapter 13 bankruptcy. If you don’t have the means, the court may approve to allow you to pay the filing fee in installments. In addition to the court fee, you are also required to take a credit counseling class, prior to filing. This may run an additional $100.
Chapter 13 does not use a means test, as with Chapter 7, but does calculate available disposable income based on the past six months. This income calculation is very important and can be troublesome as well. Because it is based on your average income over the past six months, and not your current income, a recent drop in income, or a windfall like a bonus, can skew that average and make it appear that you receive a monthly income that is greater than what it actually is.
For example, if you were making $6,000 a month for the first three months of the examined period and then $4,000 a month for the last three months, your average income is calculated at $5,000 a month. If the court trustee then forces you to devise a payment plan based on an income $1,000 greater than what you currently receive, you can imagine that it’s going to be difficult to make the required monthly payments.
Some courts try to take ―current reality‖ into consideration when making the calculations for the disposable income to be applied to the payment of your debts during your case. Even though the new bankruptcy laws seem to have been designed to put you on the defensive, the intent of bankruptcy— as established by the powers granted in the Constitution—is to help citizens get a fresh start from the effects of overwhelming debt and eliminate the days of debtor’s prisons from the days of Charles Dickens. Chapter 13 doesn’t offer much of a solution if the plan you’re forced to accept fails in the first month because your real income can’t support it.
Because of complexities like these, it’s important to have the representation of a qualified attorney who knows the ins and outs of bankruptcy laws and of your local courts handling your case.
In addition to chapter 13, there are other types of bankruptcies which deal with different types of situations. In case you’re wondering, the chapter of the bankruptcy refers to the chapter in the bankruptcy code where the laws are defined.
Here’s a quick overview of the other types of bankruptcies.
Chapter 7 bankruptcy
Chapter 7 is also known as a liquidation bankruptcy. Instead of using a payment program to repay some or all of your debts, your assets are liquidated to pay some or all of your debts and the remaining debt is discharged.
Chapter 7 is the most common form of bankruptcy but due to new laws passed in 2005, it is difficult for many to qualify for chapter 7. To qualify for chapter 7 you must pass a means test which shows a very low income or no income. Because of this, most with regular incomes and sizeable assets must use chapter 13 for bankruptcy protection.
Chapters 9, 11, 12 and 15 bankruptcy
Chapters 9, 11, 12 and 15 bankruptcy are less common as they deal with more specific groups of people.
Chapter 11 Bankruptcy - Business / Corporate Bankruptcy
Chapter 11 is the type of bankruptcy mentioned in the news most often. Chapter 11 bankruptcies are high-profile bankruptcies used mainly by corporations, limited liability companies and partnerships to reorganize their financial affairs. Individuals may file for bankruptcy under Chapter 11 but it is rare. Chapter 11 bankruptcy is a time consuming and expensive chapter, therefore it is only appropriate for individuals whose circumstances make Chapter 7 or Chapter 13 inapplicable or inappropriate. Less than one percent of all bankruptcy filings are Chapter 11s.
Chapter 9 Bankruptcy - Municipal Entities And Railroad Companies
Chapter 9 bankruptcy is the chapter that railroad companies and municipal entities - cities, counties, school districts, and gas and highway authorities - use when they file bankruptcy. Individuals cannot use Chapter 9.
Chapter 12 Bankruptcy - Family Farming Operations
Chapter 12 is used by family farmers. An individual that does not own agricultural property cannot use Chapter 12.
Chapter 15 Bankruptcy - Foreign Debtors
Chapter 15 is the chapter used by United States courts to administer assets of companies who have filed for bankruptcy protection in foreign jurisdictions.
After filing for Chapter 13, the court issues an "automatic stay" which legally bars creditors from contacting or making collection attempts from the debtor. This is one of the most powerful protective features of bankruptcy protection.
A pending repossession of your car or a foreclosure auction on your house is immediately stopped.
Other collection attempts are also frozen by the automatic stay. The calls, the letters, pending lawsuits and attempts to seize assets and freeze bank accounts are all held up by the automatic stay.
When filing for bankruptcy, your past financial transactions will be examined. If you have made any large payments to creditors in the past 90 days—defined as being great than $600—that payment may be retroactively cancelled by the courts. This is intended to ensure that no preference is made to pay one creditor and not another.
The trustee assigned to your bankruptcy will receive your monthly payment and the distribute payments to creditors according to the court approved plan.
The trustee assigned to your bankruptcy case is responsible for the following tasks:
- Examine your proposed plan of repayment
- Receive monthly payments and distribute money to the creditors v' Monitor your monthly income
- Monitor your duty to file tax returns and an annual financial statement
The trustee is paid from a portion of your monthly payment so you can be sure that he or she will not only examine your plan thoroughly, but he or she also has a vested interest in the successful execution of your plan.
While you may at times feel that the court trustee is your adversary, it’s in your best interests to work closely with him or her and to maintain open and transparent communications.
If you stop making the required payments to the trustee your case will probably be dismissed and the automatic stay will be lifted. After this happens, creditors may once again pursue you directly for repayment of debts.
During the entirety of your chapter 13 case, the court trustee is in charge of your finances. The court trustee even monitors your month income and banking activities.
As all disposable income is allocated for the payment of debt during the term of your court-approved payment plan, any increase in income is—by definition—disposable income and will be used to make additional payments to the creditors.
If your income increases, or if you experience some sort of windfall, the trustee will use this extra money to accelerate the payments according to your plan.
Increases in income may include a raise at your job, a new client, royalties, or even winning the lottery. Any such increase in income must be reported promptly. Do not make any attempts to hide such extra income. If you do so, and are caught, you could face serious criminal penalties.
It seems as though the bankruptcy laws were written with the assumption that your income will never decrease and you are expected to make the same income, or better, through the entirety of your chapter 13 case.
Obviously reality does not match this assumption. Many people end up filing for bankruptcy protection because of a substantial decrease in income in the first place. If you experience a drop in income during your case, inform your trustee immediately.
The result may be a modification to your payment plan, based on the newly calculated disposable income. In the event of a completely loss of income it's also possible that your bankruptcy will be converted into a chapter 7 filing and the remaining debt will be discharged and your case will be closed.
Through the term of your case, you are required to file your income taxes on time--of course, you should be doing this anyway--and provide a copy of your filing to the court trustee. Your creditors may also request a copy of your tax returns each year. If the request is made, you're obligated to provide them with copies as well.
Each year you will also provide an additional financial statement to the trustee. This is intended to confirm transparency on your part during the course of your bankruptcy case. It also provides evidence against you if it's found that you were hiding income, or assets, to avoid paying your creditors--so always be accurate and truthful.
Finally, you must make your payments on time, throughout the entirety of your case.
While you are protected from most types of debt with bankruptcy, some debts are not discharged.
- Taxes due within the last three years or taxes not assessed because of fraud
- Debts not listed on your bankruptcy papers
- Debts for domestic support obligations (alimony, child support, etc)
- Interest on non-dischargeable debts
- Debts for intentional injury
- Debts for certain government fines and penalties
- Debts for student loans
- Debts that were or could have been listed in a prior bankruptcy case in which you either waived your discharge or your discharge was denied
- Debts owed to a creditor for a total of more than $500 for the purchase of "luxury goods" 90 days before you filed the petition for bankruptcy
- Cash advances that total more than $750
- Debt for personal injury judgments resulting from a DUI-related accident
- HOA fees
- Pension, profit-sharing, stock bonus or such other plan payments
To file for bankruptcy, you will be required to provide a significant amount of information to the court, as a part of your filing. It is essential that the information be accurate.
- Names and addresses of all creditors, along with account numbers.
- unsecured claims (credit cards, medical bills, personal loans);
- secured claims (mortgages, liens, security interests, judgments);
- unsecured priority claims (including alimony and taxes);
- unexpired contracts and leases (leases, leases, and other active contracts).
- Ownership interest in real estate
- Inventory of personal property including the value and locations for bank accounts;
- household goods and furnishings;
- life insurance policies, and cash value
- Personal cash flow statement
The two most common forms of bankruptcy—chapters 7 and 13—are confusing to even the most intelligent. Since the passage of new bankruptcy laws in 2005, the process for filing bankruptcy—and especially the navigation of the required forms—has become very complex. For this reason alone, you should consider hiring an experienced attorney to help you with your case.
To quote Albin Renauer, co-author of How to File for Chapter 7 Bankruptcy, ―The "Bankruptcy Reform and Consumer Protection Act of 2005" (BAPCPA) is a bad law. Some lawyers and law professors have taken to calling it the "Bankruptcy Abuse Reform Fiasco" (BARF). It's based on false assumptions about why people get into financial trouble and imposes additional rules and paperwork on people already overwhelmed by bad luck and unpayable debt.‖
If you want to go it alone, the forms are available on the web. The state of Virginia has placed them online as PDF files which can be filled out through your computer. You can find the entire list of forms here http://www.vaeb.uscourts.gov/scripts/formsqry.exe
We recommend a qualified attorney to help you with your case, and not just because we earn a fee by providing the service. The issues leading to bankruptcy are very stressful for anyone. With the complexity of the new laws it’s simply too easy to get lost in the emotion and make a mistake. That’s what legal representation is for.