What Is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy, often referred to as a “wage earner’s plan,” allows individuals with regular income to develop a plan to repay all or part of their debts. Unlike Chapter 7 bankruptcy, which involves liquidating assets to pay creditors, Chapter 13 focuses on debt reorganization and allows debtors to keep their property while making structured payments to creditors over a three to five-year period. Here’s a detailed overview of Chapter 13 bankruptcy:

Eligibility

To qualify for Chapter 13 bankruptcy, individuals must have a regular source of income and meet specific debt limits set by bankruptcy laws. As of 2023, unsecured debts (like credit card bills and medical expenses) must be less than $465,275, and secured debts (like mortgages and car loans) must be less than $1,395,875. These limits are periodically adjusted for inflation.

Key Features of Chapter 13 Bankruptcy

• Debt Repayment Plan: The cornerstone of Chapter 13 is the repayment plan, which is proposed by the debtor and must be approved by the court. The plan outlines how creditors will be paid over the plan’s duration, prioritizing certain debts (like taxes and child support) while potentially reducing or restructuring others.
• Protection of Assets: Chapter 13 allows debtors to avoid foreclosure and repossession, offering a way to catch up on missed mortgage or car loan payments through the repayment plan.
• Duration: The length of the repayment plan depends on the debtor’s income relative to the median income of their state. If the debtor’s income is below the median, the plan will typically last three years, unless the court approves a longer period. If the income is above the median, the plan usually extends over five years.
• Debt Discharge: Upon successful completion of the repayment plan, most remaining unsecured debts are discharged, meaning the debtor is no longer legally required to pay them. Some debts, such as student loans, certain taxes, and alimony or child support, are not dischargeable.

The Chapter 13 Bankruptcy Process

1. Credit Counseling: Like Chapter 7, filing for Chapter 13 requires completing a credit counseling course within 180 days before filing the petition.
2. Filing the Petition: The bankruptcy process officially begins when the debtor files a petition with the bankruptcy court. Along with the petition, the debtor must submit schedules of assets and liabilities, income and expenditures, and a proposed repayment plan.
3. Automatic Stay: Filing the petition triggers an automatic stay, stopping most collection actions against the debtor and their property.
4. Meeting of Creditors: After filing, a trustee is appointed to administer the case, and a meeting of creditors is held. The debtor must attend this meeting, where creditors can ask questions about the debtor’s financial situation and the proposed repayment plan.
5. Confirmation Hearing: A bankruptcy judge must approve (confirm) the repayment plan. Creditors can object to the plan, but if it meets bankruptcy law requirements and is fair, the court will likely confirm it.
6. Making Plan Payments: The debtor begins making payments to the trustee within 30 days of filing the bankruptcy petition, even if the court has not yet approved the plan. The trustee then distributes these payments to creditors according to the plan’s terms.
7. Discharge: After the debtor completes all payments under the plan, they must take a debtor education course. Then, the court discharges any remaining eligible debts, providing the debtor with a fresh financial start.

Advantages and Considerations

Chapter 13 bankruptcy offers a way for debtors to reorganize their debts and keep their property, making it a valuable option for those with regular income who can afford a repayment plan. However, it requires discipline and the ability to stick to a budget, as failing to make plan payments can lead to case dismissal or conversion to a Chapter 7 bankruptcy.

Given the complexities of Chapter 13 bankruptcy, consulting with a qualified bankruptcy attorney can provide valuable guidance and help ensure that the process goes smoothly.