When you file for Chapter 13 bankruptcy, you agree on a plan to catch up on delinquent payments and repay your creditors over time. It provides a way to prevent foreclosure on your home or repossession of your car or other collateral. An experienced bankruptcy lawyer can explain the advantages and drawbacks of Chapter 13 and can help you determine if it is the right choice for you.
Why It May Be Right for You
Many people choose not to file Chapter 13 because it requires repayment of at least some debt, but it may be a good choice for you if:
- You have substantial unsecured debt.
In a Chapter 13 bankruptcy, you’ll pay off tax obligations, student loans, and other debts that can’t be discharged when filing Chapter 7. - You have non-exempt property that you wish to keep.
It allows you to keep your personal property-even your non-exempt possessions. - Your home is in danger of foreclosure.
You can stop foreclosure or repossession proceedings as you catch up with late payments over time. - You wish to protect a friend or relative who is your co-debtor.
As long as you follow the payment plan established by the court, your creditors will not seek payment from the co-signer on your credit card or loan.
Who Can File Chapter 13 Bankruptcy?
It is available to individuals only. If you are a business owner who wishes to file Chapter 13, you must file as an individual, but you may include any business-related debts for which you are personally responsible.
A local bankruptcy lawyer can determine your eligibility to file Chapter 13 bankruptcy, but in general:
- You must be current on filing your tax returns.
You must be able to prove that you’ve filed your federal and state income tax returns for the past four years. - Your debts can’t exceed certain limits. You cannot file if your unsecured debts are greater than $360,475 or if your secured debts are more than $1,081,400.
- You must have sufficient disposable income. You must provide proof of enough steady income (after certain allowed expenses) to repay your creditors. Wages, commissions, unemployment benefits, and payments from a pension plan are just some of the sources you can use to fund your repayment plan. If you’re married, your working spouse’s income also qualifies as a source of income.
Like Chapter 7, Chapter 13 requires proof that you’ve received credit counseling from an approved agency within 180 days before filing bankruptcy. Additionally, you cannot file if you’ve had a bankruptcy case dismissed or failed to comply with bankruptcy court orders within the past 180 days.
What’s Involved?
Below is an overview of the filing process.
- Your lawyer will begin by helping you prepare a voluntary bankruptcy petition and detailed schedules of your assets, liabilities, income, and expenses. You’ll be required to provide proof of income, copies of your tax returns for the last four years, and confirmation that you’ve participated in the mandatory credit counseling. In addition, you must develop a reasonable payment plan that outlines how you will pay off your debts. This plan must be filed with the court and is subject to court approval.
- After your lawyer assists you in electronically filing your bankruptcy petition, an automatic stay will take effect. This temporary order will protect you from harassment by creditors and your home and other property from foreclosure or repossession.
- Within 30 days of filing, you must begin to make monthly payments to the court-appointed trustee based on the terms of your proposed payment plan-even if the plan has not yet been confirmed by the court.
- After the meeting of creditors, your proposed repayment plan will be reviewed at a confirmation hearing. When your plan is approved, you’ll begin to make the scheduled payments to the trustee; these payment amounts may or may not be the same as those you originally proposed. The trustee will, in turn, pay your creditors, some of whom will receive 100% of what you owe while others receive a greatly reduced amount. High-priority debts-such as child support and tax obligations-are usually paid in full.
Frequently Asked Questions
What Property Do I Keep?
All of your property. You pay your debts out of future income.
How Much Time Does it Take?
Three to five years. During this time, you will be paying people you owe a portion of what you owe them.
What Happens to my Credit Report?
It stays on your credit report for 7 years.
What Happens to my Retirement Account or Pension if I File for Bankruptcy?
You will be allowed to keep it.
To read more frequently asked questions, visit our Bankruptcy 101 page.