Chapter 13 Bankruptcy is less about elimination of debt and more about reorganization of an individual’s finances. Instead of liquidating assets to pay creditors, Chapter 13 provides higher income debtors the chance to restructure debt into a repayment plan that lasts from three to five years. To qualify for Chapter 13, you must have a regular income, you must provide up-to-date tax returns and payments, and your total debt must be within certain limits. Since the bankruptcy laws were rewritten in 2015, those limits are a maximum of $1,184,200 in secured debt (e.g. mortgages, etc.), and a maximum of $394,725 in unsecured debt (e.g. credit cards, medical bills). After filing, your credit will take a hit — but you’ll get a chance to keep important assets like your home.
How Chapter 13 Bankruptcy Works
The Chapter 13 filing process generally takes 95 days from the filing of the petition to the approval of the repayment plan. You must complete a credit counseling course from an approved agency within 180 days before filing. You’ll take a second “debtor education” course after filing your case.
Under Chapter 13 Bankruptcy, debtors can set their own repayment plans which must be approved by the court. The plan is a central part of Chapter 13 bankruptcy, and it’s written out on either a federal form or one from a local court. The court will assign a trustee and the plan must state how much the trustee will receive each month for distribution to creditors, how you’ll get the money to the trustee, and how long the plan will last – from three to five years. Your creditors and the bankruptcy trustee will have an opportunity to object to your plan. If you’re able to make changes to everyone’s satisfaction, the court will likely approve your plan at the confirmation hearing. Your payments will begin the month after you file without waiting for confirmation.
Priority claims, which must be fully paid, include the cost of the bankruptcy proceeding and taxes owed. Secured debts are those with collateral, like a house or a car, also must be paid in full according to the bankruptcy plan. Repayment of unsecured debts, like money you owe on credit cards, is flexible. The judge will review your income and the length of the repayment plan, then decide how much you’ll owe your unsecured creditors. The amount could range from nothing to complete repayment.
Benefits to Filing Chapter 13 Bankruptcy
There are some advantages to filing for Chapter 13 Bankruptcy instead of Chapter 7 — and advantages to filing for Chapter 13 Bankruptcy versus not filing bankruptcy at all. They include: the ability save your home from foreclosure by catching up on delinquent mortgage payments; consolidating debt payments while potentially lowering the required payment amount; protecting co-signers from debt collectors; and looking better on credit reports than Chapter 7, as debts will be paid in full. A Chapter 13 Bankruptcy will remain on your credit report for seven years as opposed to ten years for Chapter 7.
Drawbacks of Filing Chapter 13 Bankruptcy
Although Chapter 13 Bankruptcy can help when you’re in a financial pinch, it does have its disadvantages. As previously mentioned, your credit will take a hit for up to seven years. Additionally you may find it harder to qualify for new credit or have trouble with situations that require a credit check, as in applying for a new job. And the biggest of all is that there are no second chances. You must keep up with the payment plan that you proposed. If you miss any payments at all, your case could be dismissed and you could potentially lose any assets that you were trying to protect.