Filing Chapter 13 Bankruptcy - A Procedural Overview
Chapter 13 bankruptcy law is at times called reorganization bankruptcy. It’s uniquely different than Chapter 7 bankruptcy. In a Chapter 7 bankruptcy most all of your debts are extinguished. But, you must lose any belongings that aren’t exempt from seizure by your creditors. Under Chapter 13 bankruptcy law, you aren’t required to surrender any worldly possessions. But, you’re expected to apply your income to pay back most or all of what you owe your creditors. Your payments to creditors are made over time, usually from three to five years. The time frame depends on the size of your debts and income.
Chapter 13 Bankruptcy Law Eligibility
Chapter 13 bankruptcy isn’t for everybody. Chapter 13 bankruptcy law requires applying your income to pay most or all of your debt. So, you’ll have to show to the court that you’re able to fulfill your payment obligations. If your income is irregular or excessively low, the court might not let you to file under Chapter 13 bankruptcy law.
If your total debt load is excessively high, you’re likewise unqualified to file under Chapter 13 bankruptcy law. Your secured debts can’t be more than $1,010,650. A “secured debt” is one that gives a creditor the power to take away a specific piece of property (like your home or car) if you don’t pay off the debt. Your unsecured debts can’t be more than $336,900. An “unsecured debt” doesn’t grant your creditor the right to take your properties. An example of an “unsecured debt” is a credit card or a medical bill.
The eligibility requirements of a Chapter 13 bankruptcy are covered in detail in Chapter 13 Bankruptcy: Keep Your Property & Repay Your Debts Over Time.
Initiating a Chapter 13 Bankruptcy
Prior to filing a Chapter 13 bankruptcy, you must complete credit counseling from an agency approved by the United States Trustee’s office. These agencies are allowed to charge a fee for their services. But, if you can’t afford to pay the fee, they have to supply reduced rate counseling and, in a few cases, free counseling.
The Chapter 13 Repayment Plan
The most consequential component part of your Chapter 13 bankruptcy paperwork is your repayment plan. It describes in detail how much money you’ll pay to each one of your debts. There’s no official form for the plan. But, virtually all courts render their own forms. To learn more about Chapter 13 Bankruptcy repayment plans, read Chapter 13 Bankruptcy: Keep Your Property & Repay Your Debts Over Time.
How Much Will You Need to Pay
Your Chapter 13 plan must pay back certain debts fully. These debts are called “priority debts” because they’re considered important enough to spring to the forefront of the bankruptcy repayment line. Priority debts include child support and alimony, wages you owe to employees, and certain tax duties. Additionally, your plan must include your usual payments on secured debts.
The plan must establish that any income you have leftover after getting to these mandatory payments will go toward paying back your unsecured debts. You don’t have to pay these unsecured debts fully. You only have to exhibit that you’re giving any remaining income towards their repayment.
How Long Will Your Repayment Plan Last
The length of your repayment plan turns on how much you bring in and how big your debts are. If your typical monthly income during the six months before the date you filed for bankruptcy is bigger than the typical income for your state, you’ll have to offer a five-year plan. If your income is smaller than the typical, you may propose a three-year plan.
Regardless of how much you bring in, your plan discontinues when you pay back all of your debts in full, even if you’ve not reached the three- or five-year mark.
What Goes On If You Can’t Make Plan Payments
If you suffer a job loss after beginning a payment plan or determine that you can’t maintain the payments on your Chapter 13 bankruptcy plan, the bankruptcy trustee may alter your plan. It’s even feasible that the court could grant the discharge of your debts on the ground of hardship. Hardship may include the abrupt loss of a job due to a company closing down or a severe debilitating illness. If the bankruptcy court won’t allow you to modify your plan or permit you a hardship discharge, you may be able to change over to a Chapter 7 bankruptcy.
How Does a Chapter 13 Case End
Once you finish your repayment plan, each remaining debt that’s eligible for a discharge is wiped out. But, before you’ll be able to obtain a discharge, you must demonstrate to the court that you’re up-to-date on your child support responsibilities and that you’ve completed a budget counseling course with an agency approved by the United States Trustee. This budget counseling course is in addition to the required credit counseling you go through before filing for bankruptcy
The New Bankruptcy Laws Usher In New Challenges
The New Bankruptcy Laws Make it More Difficult to File Chapter 7 Bankruptcy
The most recent modifications to bankruptcy laws might make it more challenging for you to file bankruptcy. If you’re in a higher income bracket you’ll no longer be permitted to use Chapter 7 bankruptcy. Rather, you’ll have to file under Chapter 13 bankruptcy and pay off at least a few of your creditors. If you want to file bankruptcy, you must take part in credit guidance prior to filing. You’re likewise required to go to further counseling in the area of budgeting and debt management. The additional counseling is a prerequisite to obtain a release of your debts. And, since the law imposes new demands on attorneys, you might have a harder time obtaining a attorney to accept your bankruptcy suit.
Narrow Eligibility for Chapter 7 Bankruptcy
Under the past bankruptcy laws, you were allowed to select the type of bankruptcy that looked best for you. In nearly all cases that would be a Chapter 7 bankruptcy settlement rather than a Chapter 13 bankruptcy repayment. But, if you’re in a high income bracket, the new bankruptcy laws won’t permit you to use Chapter 7 bankruptcy.
To find out whether you’re able to file Chapter 7 bankruptcy under the new bankruptcy laws, you must first measure your “current monthly income” against the average income for a family of your size in your state. If your income is lower than or equivalent to the median, you’ll be able to file for Chapter 7 bankruptcy. If it’s more than the average, however, you must pass a new test to file for Chapter 7 bankruptcy. The other test is known as “the means test.”
The purpose of the means test is to verify whether you have adequate available income, after deducting certain allowed expenses and required debt payments, to make payments on a Chapter 13 plan. To find out whether you pass the means test, you take off certain allowed expenses and debt payments from your current monthly income. If the money that’s remaining after these calculations is less than a certain sum of money, you’ll be able to file for Chapter 7.
Counseling Prerequisites
Before filing for bankruptcy under either Chapter 7 or Chapter 13, you must attend credit counseling with an agency authorized by the United States Trustee’s office. The reason for this counseling requirement is that it helps you in determining whether you actually need to file for bankruptcy or whether an informal repayment program will help you reclaim your financial stability.
Counseling is mandatory even if it’s clear that a repayment plan isn’t viable for you. You’re required merely to participate in the counseling. You don’t have to go along with any repayment program the agency provides. Even so, before you’ll be able to file bankruptcy, you’ll have to submit any repayment program the agency proposes along with a certificate proving that you completed the counseling.
Near the end of your bankruptcy suit, you’ll have to go to a another counseling session. This counseling session is fashioned to teach you personal financial management skills. You can’t have the discharge that wipes out your debts until you show proof to the court that you completed this requirement.
Attorneys Might Be Tougher to Find — and Much More Pricey
The new bankruptcy laws do add numerous complex requirements to bankruptcy filings. Many of these brand-new requirements impose more responsibilities on attorneys leading to bankruptcy cases being more time intensive. Among the leading new requirements on lawyers is that they must now personally ensure the accuracy of all the information their clients give them. That extra requirement means that lawyers must spend a good deal of time on every bankruptcy case. Thus, they’ll bill more to take every bankruptcy suit. The new bankruptcy law requirements have in reality driven a few bankruptcy attorneys out of the field altogether.
Some Chapter 13 Filers Will Learn to Exist on Less
When you filed Chapter 13 bankruptcy under the past bankruptcy laws, you had to devote all of your spendable income to your repayment plan. The older bankruptcy laws defined spendable income as that which you had left after paying your actual living expenses. The new bankruptcy laws have changed this computation. While you still must deliver all of your usable income, if your income is greater than the average in your state, you don’t get to compute your usable income based on your objective expenses. Rather, you have to calculate your disposable income implementing allowed expense totals specified by the IRS. And these permitted expense amounts must be deducted from your average income during the six months before filing bankruptcy, not from your real pay every month.
Additional Changes
There are additional changes that can impact you negatively if you’re filing or looking at filing bankruptcy. For plain-English guidance in the new bankruptcy laws, get a copy of The New Bankruptcy: Will It Work for You?