Chapter 13 Bankruptcy Process

By Graham Billings on January 26, 2010

Bankruptcy is the declaration that a debtor does not have sufficient funds to pay their creditors and can have large ramifications. There are different types of bankruptcy – Chapter 7, Chapter 11, and Chapter 13, to name a few, and they all represent different processes. Chapter 7 bankruptcy is the most common, where you liquidate your assets in order to pay creditors. Chapter 13 is different, mainly used to bring loans current to avoid losing personal property or to pay taxes.

Chapter 13 bankruptcy has a more complicated process than some other types of bankruptcy. Rather than asset liquidation, Chapter 13 bankruptcy allows for reorganization. If they are bringing in an income, Chapter 13 bankruptcy enables debtors to follow a court-sponsored plan for paying off debts over a several year period. As a result, only certain debtors will qualify for Chapter 13 bankruptcy. The debtor must have a sufficient stable income and debts within a certain range in order to qualify for a three- or a five-year plan.

The first step in the Chapter 13 bankruptcy process is seeing if you meet the requirements to file. There are two types of debt – secured debt, which is backed by property, and unsecured debt, which is not. In order to qualify, you must have less than $922,975 in secured debt and $307,675 in unsecured debt. You must also have an income – that is, money coming in at a rate above however much you need to pay regular expenses, like food and utilities. Because you have a stable income, this allows you the ability to reorganize your debts with a lower interest rate, which is one of the goals of Chapter 13 bankruptcy. Next, you must receive credit counseling from an agency approved by the United States Trustees’ Office. After receiving credit counseling, you will receive a certificate of completion, which is necessary to file in your petition.

If you qualify for Chapter 13 bankruptcy, you must file a petition in bankruptcy court. You will need to provide a list of all income and how often you receive it; expenses and how often you pay them; and a list of all assets and debts and those debts’ creditors. Part of the paperwork is a Statement of Financial Affairs, which asks more questions about your recent income, asset, and liability history. There are several options for filling out these documents – some software can help guide you through it, a lawyer can do it, or you can do it yourself. You must be careful to include everything, though, or else your proposal may be rejected. Similarly, if you do not name a debt, it will not be included in the process. Debts that cannot be erased include student loans and child support, so you should check to see if the debts you are trying to erase qualify under Chapter 13. You may also have to make decisions about your secured debts – for instance, if it would be better to give up an asset or keep paying on it. For these reasons, it is recommended that you get help, preferably from a lawyer, throughout the process.

Additionally, you must provide a payment plan, which will detail your plan to re-pay all your debts. The most important debts are taxes, so those come first, followed by all your other debts. Your repayment will come over a three- to five-year period, depending on your disposable income and debts. Once you have completed it, it will be given to a court-appointed trustee to review its feasibility.

Once your petition has been filed, it places a stay that prohibits creditors from contacting you over collection. Your payment plan will be sent to your creditors, and they will have a 30-day window in which to file a complaint about the plan, in which case it can be modified. In the end, if the court approves the plan, it will be set and you will begin monthly payments.

Over the course of the three- to five-year period, you will make payments to the trustee, who will then distribute them according to the payment plan. If you do not meet these payments, creditors can attempt to collect on your assets as in a Chapter 7 proceeding. Upon the completion of the payment plan, all your named debts will be erased.

If there is any change to your income, you must report it to your trustee. Under your payment plan, all your income above your expenses will be given to creditors, so if you have any disposable income you must report it. Similarly, if you lose your job or have a medical hardship, it must be reported and the plan may be modified. The most important thing is to stay organized according to your payment plan and to be honest to it.

Declaring bankruptcy is a serious matter and will have a large effect on your financial well-being. If executed properly and planned well, a Chapter 13 bankruptcy declaration can go smoothly and have you on the way to repaying all your debts. However, this is still a large process, so debt consolidation should be the first option if possible. Still, if bankruptcy is the only option, Chapter 13 may provide better for you, since it allows you to keep your personal property while still reorganizing. Moreover, if you believe you have an obligation that all debts must be paid, then this plan will allow you to eventually repay all debts. Regardless, the Chapter 13 bankruptcy process is a complicated one, so you should consult a lawyer in order to begin the proceedings.