The Truth about Chapter 13 Bankruptcy

Bankruptcy is a way for you to find debt relief through the legal process. The extent of the relief you are entitled to is based on a number of factors, such as income, amount of debt, and current financial situation. Chapter 13 bankruptcy is also known as a wage earner's plan. Simply put, under Chapter 13 bankruptcy, you must submit a repayment plan designed to repay all or part of your debt.

Of course, there are some stipulations that come with filing a Chapter 13 bankruptcy. You can only file for this type of bankruptcy if you received a discharge more than four years ago under a Chapter 7, 11, or 12; filed all of your tax returns within the past four years; and have a cosigner on a personal debt, such as a car or student loan. You cannot file for Chapter 13 if you own a corporation or a partnership.

If you have the kind of income that would allow you to pay off your debts within three to five years, then consider filing a Chapter 13 bankruptcy to preserve your precious assets, not to mention your reputation with your creditors and lenders. Individuals interested in filing Chapter 13 bankruptcy should consult with a qualified bankruptcy attorney before filing.

 

Why File for Chapter 13?

Consider filing for Chapter 13 instead of Chapter 7 if you

• cannot pass a Chapter 7 means test
• have a home in foreclosure that you want to keep
• have other high-vales assets you do not want liquidated under a Chapter 7
• owe a debt that can only be discharged under Chapter 13 due to the type or size
• need an affordable payment plan

 

Requirements

There are six basic requirements for filing a Chapter 13 bankruptcy:
• You must be a legal US citizen.
• You must have a regular income that will allow you to pay your debts according to a monthly schedule, and you must be able to do so for three to five years (if you cannot pass this requirement, then Chapter 7 bankruptcy might be a better option for you).
• Your secured debts have to amount to less than $750,000.
• Your unsecured debts have to amount to less than $250,000.
• You cannot be a stock or commodities broker.
• You cannot have been involved in a dismissed bankruptcy case within the last 180 days.

 

Process

When filing for a Chapter 13, with the help of your lawyer, compile a list of your finances, including your income, living expenses, and other debts you owe. Use this list to devise a payment plan detailing how much you can pay each month toward your debt. Submit this plan to the court. Your automatic stay is issued, and a date for your creditors meeting is set.

After your creditors meeting, the bankruptcy trustee assigned to your case will review your financial information and your payment plan to decide whether to recommend your plan to the judge. If he recommends it, you will receive a date for your confirmation hearing. During this hearing, the judge will decide whether to proceed with your payment plan. If he decides in favor of your plan, all you have to do is start making your payments.

Creditors are paid according to importance. Priority creditors are those to whom you owe a legal debt, such as taxes or legal fees. Secured creditors are second in line. Secured creditors are those who have the right to take back property you owe money on, such as a house or car. Unsecured creditors are last in line and might not be repaid under the plan if it is determined that there are not enough funds to do so. Once you start making payments, the bankruptcy trustee will distribute the money to your creditors each month.

 

Keeping Your Home

A judge in a bankruptcy case can change the terms of a loan so that those filing can keep a boat, investment properties, or vacation homes but cannot change the terms of a bad mortgage on the primary residence. If you have a good mortgage with a reasonable payment and have gotten behind for reasons other than being unable to afford it, you may be able to keep your home by filing a Chapter 13 bankruptcy to halt any foreclosure proceedings and allow you to set up a payment plan to catch up on past due amounts. You must continue to make regular mortgage payments in a timely manner.

 

New Debt

During the repayment period involved in Chapter 13, you cannot incur new debt without the approval of the trustee for the bankruptcy. Even in the case of needing a new car (such as following a car accident), you must deal with the trustee before proceeding. This protects the creditors and ensures that you do not create a bigger hole of debt. If you ask to be approved for new debt, the trustee may take this as a sign that you can handle bigger payments, so instead of approving the loan, he may order you to make higher payments to your old creditors. Be very cautious in making this type of request.

 

How Chapter 13 Affects Credit

Under the Fair Credit Reporting Act, bankruptcy can show up your credit report for up to ten years. However, this does not mean that you will be unable to secure a loan following a bankruptcy. Creditors look at a variety of factors when determining loan eligibility, including a spotless repayment history and the total amount of financial obligations you have at that point. In most cases, it is possible to obtain a mortgage or secured loan within two to three years of a successful discharge and clean credit history to date.