Understanding Chapter 13 Bankruptcy

Chapter 13 bankruptcy gives filers a chance to pay back their massive debts through a government-protected repayment plan of up to five years. In order to qualify for this type of bankruptcy, also known as “wage-earners” bankruptcy, you will need to have a regular monthly income. 

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The holy grail of Chapter 13 bankruptcy is to find some debt relief while getting caught up with your secured loans, such as a car or home, though it doesn’t come without consequences. Your credit will suffer a bit from filing. 

If you’re in a rut with your debt and are looking for a way to restructure your situation, keep reading to familiarize yourself with the ins and outs of Chapter 13 bankruptcy.

Qualifying for Chapter 13 bankruptcy

If you’re looking into filing for Chapter 13 bankruptcy, you must meet the following criteria:

  • You must have a regular income.
  • Unsecured debt must not be more than $394,725.
  • Secured debt must not be more than $1,184,200.
  • You must be up to date with tax filings.
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  • You must have not filed for Chapter 13 bankruptcy in the past two years.
  • You must have not filed for Chapter 7 bankruptcy in the past four years.
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  • You must not have filed a Chapter 13 or Chapter 7 bankruptcy petition within the last 180 days that got dismissed for specific reasons, like not showing up to your court date or complying with court orders.

How Chapter 13 bankruptcy works

Chapter 13 bankruptcy gives debtors with a regular income a chance to pay back their debts with a monthly installment plan. Filers put forward an installment plan to make payments to their creditors over a span of three to five years. 

The amount of time you will have to pay off the debts will typically depend on your monthly income. There are no cases in which filers have more than five years to make payments. 

To file for bankruptcy, you would first have to file a bankruptcy petition with your local bankruptcy court. Along with this petition, you will also need to file:

  • A list of your assets and liabilities.
  • A schedule of your current income and expenditures. 
  • A schedule of executory contracts and unexpired leases.
  • A statement of your financial affairs. 

When it comes to this bankruptcy process, debtors have the ability to propose their own repayment plans, as long as the court approves of it. The final plan—the most important part of this type of bankruptcy—will be documented on either a federal form or a form from your local court.

The plan will report on:

It’s important to keep in mind that not all of your debt will get repaid, and it will be categorized in three different ways:

  • Priority debt: These are debts that will need to be paid in full such as your student loans, child support and for the most part, tax debts. 
  • Secured debt: These are debts that will typically be paid off over a period of time and can include mortgages or car loans. If you have missed any payments, you can get caught up.
  • Payments made toward unsecured debt: Debts like unpaid credit card balances are more variable. They could end up getting reduced, and in some cases, they may even be completely forgiven at the end of your payment plan. 

Coming up with a repayment plan through the Chapter 13 bankruptcy process can make paying off your debt seem way less intimidating, while giving bankruptcy filers the chance to save their assets. 

How to make your repayment plan

Coming up with your Chapter 13 repayment plan can be a stressful and complex experience. It’s recommended that you hire a bankruptcy lawyer to help give you a realistic outlook and help you work out all the kinks. You will want to avoid making any simple mistakes throughout this process, as doing so will only lead to more uncertainty.

It doesn’t hurt to get familiar with the basics of this bankruptcy process before you meet with an attorney—that way, you know what questions to ask and can be more aware during these conversations. There are two processes that take place in the early calculation stage:

  • The means test.
  • Creating the plan.

The Chapter 13 means test is how the basic framework for your repayment plan is established. The test is split into two forms: 

  • Form 122C-1: This portion of the test will verify your average monthly income by asking you for information on each source of your household’s total income. Once this number is configured, it will be compared to your state’s median income contingent on how many people you live with and whether or not you are married or single. This information is basically what is used to determine the length of your plan. if your income lies below your state’s median, then your plan is most likely going to be for three years. If it’s equal to or more than the state’s median, your installment plan can have a duration of five years.
    Ultimately, it’s up to the court to put a timeline on your repayment plan, but this part of the test serves as a good baseline. 
  • Form 122C-2: This form calculates the amount of income you are able to put toward paying back your creditors. When filling out this portion of the test, you are able to deduct many different types of expenses such as food, basic needs, insurance, bills, etc. However, it’s important to be honest about how much you are spending in each category. Not only are their limits to how much can be expensed in each category, but listing inaccurate numbers can cause you to have a hard time in court when its time for assessment. 

After you’ve taken the Chapter 13 means test, it’s time to start piecing together your actual repayment plan. No two repayment plans look the same, due to everyone’s unique sets of debts and needs, so remember to get guidance from an attorney. 

Once you’ve created your repayment plan, you have 14 days from the date you filed, to file your finished plan with the bankruptcy court. 

Keep in mind that there is no guarantee your case will get approved. A hearing will be held to allow your creditors a chance to object, and the court will make the final decision. 

In some cases, it can take up to three months for your plan to be approved. Even if this happens, you are still responsible for making payments on the plan within the first 30 days of filing. 

How the repayment plan works

If you get approved for Chapter 13 bankruptcy, you will be assigned a bankruptcy trustee. Your trustee will act as a liaison between you and the bankruptcy court., and your creditors This means that most of your payments will be handled between you and your appointed trustee. It works like this:

  1. You give the payment to your trustee based off the agreed-up on schedule.
  2. Your trustee divides up the payments and pays your creditors according to the details of the plan. 

If you’re not the sharpest at paying your bills on time, consider setting up reminders or putting your payment on autopay. Failing to get your payments over to your trustee can result in either getting your bankruptcy case cancelled—meaning you’ll be responsible for your debts all over again—or, it could be changed into a Chapter 7 bankruptcy, which would mean compromising some assets.

Final Thoughts

Deciding to file for Chapter 13 bankruptcy could get you back on track to take care of your debts. It’s a complicated process but if you feel like you are drowning in debt and need a structured way to pay it all back, this could be the right option for you. 

If everything goes well and you follow your plan accordingly, you can increase your changes of getting a bankruptcy discharge. 

Filing for Chapter 13 bankruptcy will affect your credit, but remember—your credit can always be recovered.