Even if you don’t have a full-blown case of triskaidekaphobia (fear of the number 13), superstitions about 13 are common. Many people are wary of the number 13, seeing it as a sign of bad luck, even to the point that one manufacturer admitted that 85% of their elevators don’t have a “13” on their number panel.
It’s ironic, then, that a Chapter 13 bankruptcy (named not for an ill omen but the relevant chapter in the U.S. Bankruptcy Code) is one of the most powerful, positive ways individual debtors can reorganize their finances, businesses, and even their lives. So let’s explore why a Chapter 13 filing is an important option—and one that shouldn’t be scary.
Simply put, a Chapter 13 filing is a reorganization bankruptcy. With a Chapter 13 filing, individual debtors develop a court-approved plan to repay their debts (in part or in full) that allows debtors to keep assets such as a family home.
Chapter 13 Eligibility Requirements
Chapter 13 is only available to individuals but can include self-employed individuals or operators of an unincorporated business. However, it is only open to those whose unsecured debts total less than $465,275 and whose secured debts are less than $1,395,875. And individuals cannot file under Chapter 13 if they have already had a petition dismissed within 180 days.
With few exceptions for emergencies, Chapter 13 filers must take a credit counseling course within 180 days of filing.
Chapter 13 Process
A Chapter 13 bankruptcy begins when a debtor files the required documentation and pays filing fees in a local court where the debtor resides. Included in the initial filing, a debtor must provide:
- schedules of assets and liabilities (including a list of creditors);
- a schedule of current income and expenditures;
- a schedule of executory contracts and unexpired leases;
- a statement of financial affairs
- the credit counseling certificate
- evidence of an employer’s payments within 60 days
In addition to the federal rules that apply in all bankruptcy courts, district courts can establish local rules, and judges themselves may have procedures for their courtrooms. But overall, there is a general routine for Chapter 13 cases.
(1) As soon as the court clerk accepts the filing, there is an automatic stay of all litigation against the petitioner—including foreclosure of the debtor’s home—and any co-debtors who could be held liable for the petitioner’s debt.
(2) An independent trustee is appointed to oversee the case.
(3) Within 14 days after the debtor filed the petition, the debtor must submit a repayment proposed plan. A plan typically explains how debts will be repaid over three or five years, with any remaining debts to be discharged.
(4) Between 21 and 50 days after the debtor has filed, the trustee holds a meeting of creditors, where the debtor must answer questions regarding their finances and the proposed plan
(5) Within 30 days of filing the petition, the debtor begins making plan payments, even if the plan hasn’t yet been approved.
(6) No later than 45 days after the creditors’ meeting, the court has a hearing to decide if the proposed repayment plan is acceptable. If the court confirms the plan, then it will be in force. The debtor will make the payments according to the plan. The remaining debts will be discharged, typically after completing the repayment term.
Understanding the Repayment Plan
Industry officials and the courts liken a Chapter 13 bankruptcy plan to a consolidation loan. It restructures your debts, so you have one or two monthly payments. Then the trustee forwards these payments to your creditors, who are divided into three categories:
- Priority creditors: Debts that must be paid off in full and cannot be discharged, such as child support payments.
- Secured creditor: Debts that are backed by collateral and are often repaid in full or to the value of the collateral.
- Unsecured creditors: Including credit card bills and personal loans, unsecured debts, if they aren’t paid in full by the end of the plan, are frequently discharged.
To create a repayment plan, filers must add all sources of income, then compare their income to the state’s median income. If the petitioner’s income is below the median, they can prepare a three-year plan. If it’s above the median, they need a five-year plan.
For the plan itself, the petitioner begins with their income, then subtracts allowable deductions (e.g., for food and health insurance), and then calculates a disposable income that can be used to repay creditors.
Chapter 13 and Homeowners/Those with Mortgages
Unfortunately, a Chapter 13 filing cannot help someone whose home has already been foreclosed upon before the filing. But once a debtor has filed the petition, foreclosure proceedings are immediately frozen and can’t go forward. Chapter 13 can also cure delinquencies and provide other advantages to help a debtor keep their home.
Petitioners must pay on-time mortgage payments throughout the approved repayment period. If they do not, they can still lose their home. But if they complete the payment plan, they usually keep it.
In Arizona, local rules allow a petitioner to obtain a new home loan or refinance an existing one. The trustee must approve the loan, and there are requirements for their approval. The loan must be a residence for the debtor and their family; the only collateral for the loan is the home itself, and the monthly payment must be less than the debtor’s existing mortgage payment.
Consolidating debt can sometimes help you get a better loan because it’s also improved your other indebtedness.
While a Chapter 13 bankruptcy can help you keep a home you have, the filing can also impact your future ability to buy a home.
Discharge of debt can result in a lower credit score; therefore, lenders are less likely to give you their best rates. You may need to accept a higher interest rate or pay a higher monthly mortgage.
A Chapter 13 filing will impact conventional mortgages for two years after discharge (at least four years after the petition). Government-offered specialized mortgages have other timelines—sometimes just a year.
Don’t forget that you are more than your credit score. You can submit letters or other evidence to mortgage lenders if there are extenuating circumstances or other factors relating to your bankruptcy that lenders should know about when determining your loan.
Understanding Chapter 13 Discharges
If a debtor has finished all payments under the approved plan, then certain debts are discharged, so no more money is due, and creditors cannot pursue additional payment. However, all debts are not dischargeable, and a debtor must meet other requirements for a discharge as well.
Debts that are not dischargeable include:
- Alimony
- Child support
- Government student loans
- Government benefit overpayments
- Some federal taxes (e.g., payments to employee’s Social Security or withholding)
- Debts relating to death or personal injury caused by the debtor’s driving while intoxicated
- Some criminal fines or court-ordered restitution to victims
Unlike Chapter 7 discharges, Chapter 13 can result in the discharge of other debts such as property settlements from a divorce or separation. Debts relating to fraud or malicious actions that resulted in injury or death may be discharged, but creditors have the option to challenge the discharge.
To qualify for discharge, a debtor must not have had discharge in another bankruptcy proceeding for at least two years for a previous Chapter 13 filing or four years for a Chapter 7, 11, or 12 petition. The debtor must certify that they’ve paid all domestic support, and they need to complete a financial management course before discharge.
If a debtor cannot fulfill the approved plan, through no fault of their own, they can petition the court for a “hardship discharge.” In the case of a hardship discharge, the discharge becomes more like a Chapter 7 filing, mirroring what can and cannot be discharged in those proceedings. One reason someone might get a hardship discharge would be if they became injured and could no longer earn the income necessary to make the required payments.
Why You Might Choose Chapter 13 Over Chapter 7
Many debtors considering bankruptcy don’t see why they should file under Chapter 13 rather than Chapter 7, which is faster and discharges the debtor’s debts without years of payments. But there are reasons why a debtor might choose one format over the other.
For some, there isn’t a choice. For instance, to be eligible for Chapter 7, a debtor must satisfy a means test for their disposable income. In contrast, Chapter 13 eligibility is based on the amount of debt a petitioner has.
It’s fair to say that Chapter 7 offers a faster resolution of the proceedings, and the result is a quick path to a “fresh start,” while Chapter 13 proceedings take longer. Debtors must continue to pay their debts during the proceeding and for the duration of the plan. And some decide that Chapter 13’s required payment of disposable income would be too high to manage for the required years.
On the other hand, Chapter 7 is often considered a more draconian proceeding with harsher results. Chapter 7 doesn’t protect a debtor’s home, or other key assets like Chapter 13 does. Under Chapter 7, a trustee can sell all non-exempt property to pay creditors, while Chapter 13 filers keep their assets. And Chapter 7 will impact a petitioner’s credit for 10 years, while a Chapter 13 filing will likely affect it for up to seven years.
Another motivation for filing under Chapter 13 is if a petitioner is concerned that a co-signer to a loan may be responsible for their debt. Chapter 13 stays proceedings against a co-debtor as well as the filing debtor.
In truth, there’s no right answer as to which filing is “better.” Instead, it’s about examining your debts, assets, income, and other responsibilities. It’s about looking toward the future. It’s figuring out what’s best down the road, not just around the corner.
That’s why it is so important to have an attorney help you as soon as you start considering bankruptcy.
An attorney can help you understand every aspect of the proceeding, give you other alternatives, and explain the possible repercussions of each. After all, the goal of any bankruptcy proceeding is to help get you out of trouble and into some place better than where you are now. The last thing you need is for the bankruptcy to make things worse.
Charles Laputka is a Bankruptcy attorney in Allentown, Pennsylvania. If you need help filing for Chapter 7 or Chapter 13 Bankruptcy, Laputka Law Office can help. Located in Allentown but willing to help statewide.
