What is Chapter 13 bankruptcy?
Chapter 13 bankruptcy is a type of filing for individual persons. Chapter 13 requires a debt repayment plan of three (3) to five (5) years. Chapter 13 bankruptcy is often referred to as the "wage-earner's plan." This is a form of bankruptcy in which the debtor proposes a repayment plan and a portion of the unsecured debt is paid over time. Monthly payments on mortgages and vehicle loans, both current and/or delinquent, can be repaid through the Chapter 13 Plan. Plan payments are made each month to a bankruptcy trustee, who then pays creditors pursuant to a confirmed plan. During the repayment period, creditors are prohibited from starting or continuing collection efforts. Chapter 13 bankruptcy deals with three types of debt, and each repayment plan is unique:
- Priority debt includes domestic support obligations, amounts owed to a government unit, criminal fines, restitution and most tax obligations. These debts must be paid in full through the repayment plan.
- Secured debt, such as a mortgage or vehicle loan, must be repaid in time, and the repayment plan can also be used to catch up late payments and to stop a foreclosure sale or vehicle repossession.
- Unsecured debt, such as credit cards, medical debt, pay day loans, and even old tax debt from timely filed returns will be paid a portion of the total amount due with the balance discharged upon completion of the Chapter 13 Plan.
- Stretching repayment over three (3) to five (5) years gives debtors a more manageable way to pay off debt without the hassle of contact by collection agencies.
- Unlike Chapter 7 bankruptcy, Chapter 13 does not call for the debtor's assets to be liquidated. If you have disposable income, Chapter 13 is a way to repay debt without losing your home, accumulated home equity, vehicle, and other items of high value that are important to you.
- Delinquent tax debt paid through a repayment plan will stop the accrual of penalties and interest on the amount owed.
- Chapter 13 provides debt consolidation, as payment on all debts is made via a single, predictable payment to the court-assigned bankruptcy trustee. This will result in lower payments than what would be required outside of bankruptcy.
- Completion of a Chapter 13 repayment plan can be used to demonstrate consistent, positive payment history.
- All disposable income received is required to be paid into the repayment plan.
- Debts will not be discharged until the repayment plan is successfully completed, which means you will be dealing with the debt longer than you would with a Chapter 7 bankruptcy.
- A monthly household budget will be established at the time of filing and modifications can be made, but will not be immediate.
- There is an added pressure of keeping up with the payments as approved in your repayment plan. While you may be able to modify those payments, missing payments may result in a dismissal of your case.
Who Is Eligible?
The following are some of the eligibility requirements for filing Chapter 13 bankruptcy:
- You must have a regular form of income. If your income level exceeds the state median income where you live, you will be required to commit your disposable income to a 5-year repayment plan. If your income level is below the median income, you will be required to commit your disposable income to a 3-year repayment plan.
- Your total unsecured debt cannot exceed $419,275 and your secured debt total cannot exceed $1,257,850 (2019 limits). The debt limits are adjusted every three years.
- Your individual and/or business tax filings must be up to date.
- You must receive credit counseling from an approved credit counseling agency within 180 days prior to filing.
- Once your repayment plan has been submitted and approved by the court, you must make payments as directed in the plan. Missed plan payments may result in dismissal of the Chapter 13 case.
Is Chapter 13 bankruptcy right for you? Let us discuss the process and provide guidance that can help you answer that question for yourself. Contact Gravis Law online or by calling (509) 380-9102 for a free consultation.
DISCLOSURE We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.