Chapter 13 bankruptcy, also referred to as the "wage earner's plan," is a type of proceeding that lets debtors:
Reorganize their debts.
Develop a repayment plan to be approved by the bankruptcy courts and monitored by a trustee.
Pay some or all of their debts over the course of three to five years. The allowable span of a repayment plan depends on the debtor’s monthly income as follows: (1) Less than the applicable state media = three years, or (2) Greater than the applicable state media = five years.
How Does Chapter 13 Bankruptcy Work?
Debtors must disclose to the courts a list of all the creditors that they owe and the respective amounts due to each, and then propose a monthly repayment plan. The courts will appoint an impartial trustee to manage the consolidated debt and distribute the monthly payment across the creditors.
After filing under Chapter 13 bankruptcy, collection actions from creditors included in the list provided to the courts must automatically cease. The trustee becomes the single point of contact, so debtors will not have direct contact with creditors, and vice versa, for the duration of the repayment plan.
This also applies to co-debtors, so creditors cannot approach them to collect for consumer debts.
Eligibility Requirements for Chapter 13 Bankruptcy
To be eligible to be granted a Chapter 13 bankruptcy, these are the requirements you might abide bi.
You must not have a prior bankruptcy petition dismissed during the preceding 180 days due to willful failure to appear before the court or comply with the court’s orders, or voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.
You must have received credit counseling from an approved credit counseling agency within 180 days before filing, either in an individual or group briefing.
Advantages of Chapter 13 Bankruptcy
The biggest plus is that it gives debtors the chance to avoid foreclosure of their homes and fix delinquent payments on their mortgage. Take note that debtors are required to pay on time all mortgage payments that are due over the course of the Chapter 13 repayment plan.
It lets debtors reschedule the payment of their secured debts, aside from their mortgage, and extend them throughout their repayment plan.
Chapter 13 bankruptcy consolidates various loans and enables the debtor to only pay one monthly fee to the trustee. The trustee distributes the payment across the creditors.
Additionally, it provides protection for the debtor such that they will not have direct contact with the creditors throughout the Chapter 13 repayment plan.
The Process of Filing for Chapter 13 Bankruptcy
Here’s how it works, step by step.
1. File a petition with the bankruptcy court in your area of domicile or residence.
Include the following:
schedule of assets and liabilities.
a schedule of current income and expenditure.
a schedule of executory contracts and unexpired leases.
statement of financial affairs.
certificate of credit counseling.
copy of any debt repayment plan developed through credit counseling.
evidence of payment from employers, if any, received 60 days before filing.
statement of monthly net income and any anticipated increase in income or expenses after filing.
a record of any interest the debtor has in federal or state qualified education or tuition accounts.
copy of the tax return or transcripts for the most recent tax year, as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began).
2. Complete the official bankruptcy forms.
Compile the following:
List of owed creditors, types of claims, and the amounts that are due.
Debtor’s monthly income, source of income, and frequency.
Comprehensive list of debtor’s monthly living expenses including food, clothing, shelter, utilities, taxes, transportation, medicine, and others.
3. The bankruptcy courts will charge their fees.
$235 – case filing fee
$75 – miscellaneous administrative fee
These are typically paid to the clerk upon filing the petition but can be paid in installments with permission from the court.
After the petition is filed, the court appoints a trustee to evaluate the case and act as the single point of contact for the collection and distribution of payments.
A repayment plan must be submitted either along with your petition or within two weeks of filing. If the court approves it, then the trustee will begin with the disbursement of payments as soon as practicable. But if the plan is disapproved, then you may submit a revised repayment plan.
How is Chapter 13 Different from Other Bankruptcy Plans?
The government offers various bankruptcy plans to cater to diverse needs and income brackets. Here’s how they differ from Chapter 13:
Discharges [wipes out] unsecured debt.
... versus ...
This ceases foreclosure proceedings, so debtors can keep their homes.
Similar to Chapter 13, it allows for restricting and staggered payments over time, but is typically costly and complex, so it is frequently done by businesses.
... versus ...
This is a simpler alternative for debtors with income higher than the eligibility for Chapter 7.