More than 423,000 individuals and organizations filed for bankruptcy in 2021. Filing for bankruptcy may be your best and only option if you cannot repay your debts in time. You can choose from three bankruptcy options: Chapters 7, 11, or 13.
Notably, Chapter 13 bankruptcy is easier and more convenient than Chapter 7 and 11 bankruptcy laws. Here is a brief guide on what you need to know about Chapter 13 bankruptcy, including its eligibility requirements, advantages, and disadvantages.
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is a bankruptcy law that requires debtors to reorganize their finances and repay their debts under a plan reviewed, approved, and supervised by a federal court. Essentially, some of your debts are eliminated or reduced, and the rest are consolidated.
Chapter 13 bankruptcy grants debtors three to five years to repay their outstanding debts as agreed under the payment plan. Notably, you can retain your assets (including property) under Chapter 13 bankruptcy. You can also get junior liens (second and other subsequent mortgages) eliminated and unsecured debt (such as credit card debt) reduced under this law.
How Chapter 13 Bankruptcy Works
Chapter 13 bankruptcy is also known as a wage earner's plan because debt repayment is the underlying principle. You can file for Chapter 13 by filing the necessary paperwork at a federal court. The court will then consider your application and approve it if you meet the eligibility criteria – the clerk will send you a letter detailing the court's decision.
You must then develop a payment plan and submit it to the court for consideration. The payment plan should include the following information:
- A list of all creditors and the amount owed to each.
- A list of all your properties and assets.
- Proof of income.
- A detailed breakdown of your monthly living expenses.
- Federal and state tax return documents.
The bankruptcy judge or administrator will then schedule a hearing to determine your application's eligibility. Notably, your creditors can dispute your payment plan, and you can alter the plan to reach a favorable compromise. Ideally, the judge will then approve the plan and assign a trustee. You must then make the monthly payments to the appointed trustee, who then distributes the payments to the creditors – the law limits direct interactions between debtors and creditors.
Who is Eligible for Chapter 13 Bankruptcy?
You must meet the following requirements to be eligible for Chapter 13 bankruptcy:
- Person Status – You must be an individual (businesses are not eligible for Chapter 13 bankruptcy).
- Debt Limits – Your outstanding debt must also be within the set limit. Debt limits vary for secured and unsecured debts and usually change every three years. The current limits range between about $400,000 and slightly more than $1.2 million.
- Income Requirements – You must also receive a monthly income, and it must be sufficient to repay the debts within the set period.
- Tax Payments – Your tax filings must be up-to-date.
It is also worth noting that you must take a mandatory credit counseling course within 180 days (six months) before filing for Chapter 13 bankruptcy. The DOJ U.S. Trustee Program must approve your credit counseling course.
Advantages of Filing for Chapter 13 Bankruptcy
Filing for Chapter 13 bankruptcy can be advantageous in the following ways:
- You get more time to pay off your debts.
- You can get some of your debts reduced or canceled.
- Your debts are consolidated, making them easier to manage.
- You can keep your assets, including real estate property.
- The court prohibits creditors and debt collectors from contacting you, giving you some peace of mind.
- Your co-signers are financially protected.
Overall, asset retention is the greatest advantage of filing for Chapter 13 bankruptcy. Notably, Chapter 13 gives you a softer landing than Chapters 7 and 11.
Disadvantages of Filing for Chapter 13 Bankruptcy
Filing for Chapter 13 bankruptcy can also be disadvantageous in the following ways:
- It will lower your credit score, and the record will stay on your credit report for seven years.
- It will limit your disposable income – you may be required to use 100% of your disposable income to pay off the debt.
Notably, the court can throw out your Chapter 13 bankruptcy case if you fail to pay your debts on time as agreed under the payment plan. Ideally, you should have reliable income sources for the debt repayment duration.
Get Professional Help
Filing for Chapter 13 bankruptcy will give you some relief on your outstanding debts. Ideally, you can pay off most or all of your debts within three to five years, depending on the court's ruling.
It is prudent to consult or hire a lawyer when filing for Chapter 13 bankruptcy. Fortunately, the Law Offices of James C. Shields is the go-to law firm for all bankruptcy matters. Get in touch today to learn more about how we can help.