Chapter 13 may not be everyone’s first choice when it comes to bankruptcy, but that doesn’t mean it can’t be an effective way of clearing your debts. The trick is to know enough to make the most out of the opportunity that bankruptcy gives you. If you aren’t clear on the complexities of Chapter 13 bankruptcy or have a particular question about the process, you’ll find the answer in this FAQ.
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy allows eligible debtors to retain all of their assets while providing them with a three to five year grace period to pay off outstanding debts. After this period, all remaining eligible debt is discharged.
Naturally, there are strict rules which govern how debt is repaid under Chapter 13. You must pay all secured and priority debt such as your mortgage and alimony payments in full. You must also make payments that are more than or equal to the total value of your assets. So if you have assets totaling $200,000, you must repay at least $200,000 worth of debt over the three to five year period. To be clear, the repayment period will be five years unless you earn under your state’s median monthly income, in which case it may be shorted to three years.
Who is eligible for Chapter 13?
More people are eligible for Chapter 13 than they are for Chapter 7. That’s because you do not have to pass a means test, but there are still rules governing who can apply. In particular, your secured debts cannot exceed $1,081,400 and your unsecured debts cannot exceed $360,475.
What is the process of Chapter 13?
Like Chapter 7 bankruptcy, you will need to file a petition with your local federal bankruptcy court that will include filing several forms and paying the necessary fee.
Once your case has been filed, you will need to suggest a repayment plan that will be assessed by your case’s trustee and your creditors, and either approved or rejected. If approved, you will begin the payment plan immediately and the money you pay in each month will be distributed between your creditors. Any unsecured debts that remain after the repayment plan has been completed are discharged.
The Chapter 13 process is considerably longer than Chapter 7, and you will have responsibilities until your repayment plan has ended.
What responsibilities do you have during Chapter 13?
Over the course of your three to five year grace period, you will have to comply with a number of requirements to remain eligible for Chapter 13, these include:
- Sending all creditors a note of your bankruptcy
- Paying all secured debt off during your repayment plan
- Repaying priority debts in full
- Making payments to your trustee every month
- Not incurring significant new debt
- Updating your trustee with annual tax returns and expected changes in income
- Getting court approval for any new loan or for buying, selling, and refinancing your home
Should you not adhere to these responsibilities, you risk your case being dismissed and the stay against your debtors being lifted.
What are the fees for Chapter 13?
You must pay several fees when filing for Chapter 13 bankruptcy, including:
- A $274 filing fee
- A trustee’s fee which is equal to 10% of the total repayments under the plan. So if you repay $10,000, there is a trustee’s fee of $1,000
- Attorney fees if applicable.
Do you need an attorney?
While you can petition for Chapter 13 bankruptcy yourself, it is recommended that you seek professional help from a bankruptcy attorney. Yes, a lawyer can be expensive, but they are almost always worth the money since they can ensure that your bankruptcy goes smoothly and that you pay back as little debt as possible.
What’s more, an attorney will handle all of the paperwork relating to your case and take on responsibility for correctly filing your statements. This means that they become liable for mistakes and you can seek damages from them should your case get dismissed.
Will Chapter 13 bankruptcy impact my credit score?
Yes, Chapter 13 will be listed on your credit score for seven years and cause your score to drop by around 200 points. This can make it impossible to access credit for at least a couple of years. You will then find that interest rates will be incredibly high and lines of credit very low when you eventually do get access. Obtaining a mortgage is also likely to be impossible for the duration of your repayment plan and possibly for several years after.
The good news is that the impact of bankruptcy on your credit score is diminished with time and it is possible to rebuild your credit score to a good level after the repayment period has ended.
What happens if I can’t make the monthly payments?
There may be cases such as a significant change in income or large unavoidable expenses that leave you unable to pay your monthly payments. Should this happen, your lawyer will need to file a moratorium which will be subject to approval by your trustee. In most cases, your repayment plan will be lengthened to make up for any temporary setbacks.
Things are different if you are suffering a long-term financial setback. In this case, you will need to apply for a modification and possible a hardship discharge. If the impact on your finances is so big that you qualify for Chapter 7 bankruptcy, you may even be able to convert your bankruptcy and have outstanding debts discharged. Alternatively, you can voluntarily dismiss your current bankruptcy and file a new one with better repayment terms.
How can I know if Chapter 13 is right for me?
Having read this FAQ, you should have a stronger understanding of how Chapter 13 bankruptcy works and the impact it can have both on your finances and your future. If you’re still confused, speaking to a credit counselor should be your next step. These professionals can show you the alternatives to bankruptcy and help you decide what is the right move for you. Ultimately, it is your decision. While you should be guided by expert advice, you should not be led by the opinions of friends and family. Although there is a stigma surrounding bankruptcy, it can be the fresh start that many people need.