Times are challenging in America with the coronvirus. You may be experiencing some of the stress from a financial hardship and are considering a Chapter 13 bankruptcy. The purpose of this article is to inform you about the Chapter 13 option and provide you an opportunity to estimate your Chapter 13 plan and the pros and cons of a Chapter 13 bankruptcy. The article is quite long, so feel free to jump around to whatever’s most useful.
There are two types of bankruptcies that are most common to the consumer: Chapter 7 and Chapter 13 bankruptcy. The Chapter 13 Bankruptcy which offers debt adjustments for those with regular incomes. It’s referred to as the wage earners bankruptcy. Many people consider a Chapter 13 Bankruptcy because they do not qualify for a Chapter 7 Bankruptcy. Sometimes, consumers have too many assets that would not be covered by bankruptcy exemptions.
Chapter 13 Bankruptcy Introduction:
The Chapter 13 Bankruptcy code maybe a vital tool for individuals that have debt that is unmanageable and have assets that exceed federal and/or state bankruptcy exemptions or do not qualify for a Chapter 7 bankruptcy. The Chapter 13 bankruptcy also may allow you to protect your property from foreclosure.
That said, it’s important to understand the homestead exemptions and other exemptions in your state. For example, if your home equity is below the homestead equity exemption for your state and you are able to keep your vehicle in bankruptcy, a Chapter 7 bankruptcy may be a more attractive option. That is why you may wish to take a Chapter 7 bankruptcy means test calculator just to see whether you may qualify. The results email provides the estimate homestead exemptions for your state for you to compare against your assets.
Okay. Let’s discuss the nuts and bolts of A Chapter 13 bankruptcy. Chapter 13 bankruptcy provides a chance for individuals to reorganize their secured debt aside from the mortgage for their main home. It allows them to lower their debt payments during the agreed upon duration as filed. The Chapter 13 Bankruptcy also protects the debtor from being harassed by debtors in situations where consumer debt is involved. It also acts as a provision for loan consolidation where the debtor goes through a trustee who facilitates payment distribution to creditors. Chapter 13 Bankruptcy guidelines indicate that there should not be direct contact between debtor and creditors.
The introduction of an intermediary (the Chapter 13 trustee) to the process removes the pressure from the debtor. Creditors are no longer breathing down his/her neck demanding for payments. It also facilitates proper and professional management of the debt portfolio. It highlights the protective approach of the Chapter 13 Bankruptcy code guidelines designed to protect debtors.
Also, note that the bankruptcy code does not mean that the debt burden of the debtor is abolished. Rather, it provides options that make it easier for the debtor to pay off his debts. Hence, why consolidation and trustees come into play.
Chapter 13 Payment Plan
You will have a monthly payment in a Chapter 13 payment. The calculation uses bankruptcy forms that we read and thought were a bit complex, so we decided to create a Chapter 13 bankruptcy calculator below based on the forms to allow you to estimate you what your monthly payment would be in a Chapter 13. Please note that the courts uses means testing data found here with the recent data as of May 1, 2020, so we use that data as well in the Chapter 13 calculator.
The Chapter 13 calculator also allows you to compare against a Chapter 7 bankruptcy along with other debt relief options such as debt management or debt settlement. IMPORTANT: If your disposable income is high, it may show a very expensive monthly payment. We would be happy to walk what that means with you or discuss the information.
Important things to note about the calculator:
- It takes about 3-5 minutes to complete.
- It compares 5 different debt relief options including Chapter 7 bankruptcy
- It uses bankruptcy forms and bankruptcy means test data for filings on or after May 1, 2020
- It’s a best estimate given from the information provided.
- It is 100% free. Only an email is mandatory to provide the estimates to you. How does Ascend make money? We receive donations and small referral fees from different providers.
Chapter 13 Bankruptcy Advantages:
Chapter 13 Bankruptcy guidelines offer numerous advantages making it quite appealing and useful to anyone that might be planning to file for bankruptcy.
- It may protect the debtor from home foreclosure. It might be the most advantageous aspect of the Chapter 13 bankruptcy code. A home is perhaps the most valuable possession for most people. It would be quite an unfortunate situation if one lost their home due to debt. Once the debtor has filed for bankruptcy under the bankruptcy code, he/she is guaranteed that his/her residence will not be auctioned.
- It allows the debtor to reschedule his/her debt. Every type of debt usually comes with a fixed duration during which the debtor is supposed to complete the repayments. Most of the people facing bankruptcy are not in a position to pay off their debts within the stipulated duration. However, Chapter 13 Bankruptcy code allows the debtor to reschedule secured debt, so that it extends into the duration provided under the Chapter 13 bankruptcy filing. It gives a chance for the debtor to work towards clearing those debts.
- Lower payments. A rescheduled debt and expanded debt duration is advantageous for the debtor because it might help lower the payments. It will allow the debtor to pay less in monthly installments, so that he/she has access to more funds that can then be used in other areas. These include upkeep and paying off bills.
Other Advantages to Consider
- Third party protection. The Chapter 13 bankruptcy code is also ideal because it protects third parties that have co-signed to a loan. It means that the creditors will not go for the co-signer in case the debtor fails to pay. Third parties will thus not find themselves in trouble in case the person they co-signed with ends up being bankrupt. The aim here is to avoid inconveniencing others.
- Chapter 13 consolidates the debt, so that it acts as a single loan that is then handled by a trustee. It means that the trustee receives payment from the debtor who then distributes the received amount to the creditors. The trustee also eliminates the need for direct contact between the debtor and the creditors.
Chapter 13 Bankruptcy Disadvantages:
There are some downsides to filing for Chapter 13 Bankruptcy. For example, a Chapter 13 bankruptcy may negative impact both your credit report and credit score. It will also be on your publicrecord for a period of seven years.
The other disadvantage is that the Chapter 13 Bankruptcy filing process is quite intensive and often take 3 or 5 years. Another drawback addresses any additional sums of money that the debtor receives during the bankruptcy period. Thus, if the debtor receives an increase in salary, then there may be implications on your Chapter 13 plan payment.
You may want to take a look at what the common reasons are for Chapter 13 dismissal and see whether you may be at risk before you start a Chapter 13 payment plan
Chapter 13 Bankruptcy Eligibility:
Not everyone that is approaching bankruptcy can file under Chapter 13, so it is essential to understand the required criteria for one to qualify. The Chapter 13 Bankruptcy, therefore, provides clear guidelines that allow individuals to determine whether they qualify to file for bankruptcy under this specific code. Anyone is allowed to file for bankruptcy under Chapter 13 if they have less than $419,275 in unsecured debt and if their secured debt is below $1,257,850. These are the Chapter 13 debt limits. The above figures are regularly adjusted in line with changes to the consumer price index. We created a Chapter 13 Calculator to help you estimate your plan payment
Note that individuals may forfeit eligibility if they fail to show up in court within 180 days before filing a bankruptcy petition. Also, if they do not comply with the court orders regarding their filing they can be in danger of becoming unqualified. Finally, if individuals fail to attend credit counseling within 180 days prior to filing for bankruptcy, then they can also become ineligible.
Note that an authorized counseling agency should handle credit counseling. However, there are exceptions. For example, in an emergency where the debtor has limited time, or in case the number of credit counseling agencies is very few. Debtors are also required to file their debt management plans with the court. Note that the debt management plans are supposed to be made during the period of debt counseling. Preferably with help or guidance from the selected debt counseling firm.
How Chapter 13 Bankruptcy Works:
To successfully file for a Chapter 13 bankruptcy, individuals are required to start the process by filing for a petition with a local bankruptcy court. The individual will also be required to provide personal financial details. For example, unexpired leases, incomes, and expenditures to include assets & liabilities.
One is also required by law to file for a credit counseling certificate accompanied by a debt repayment plan. Tax return transcripts are also required. There are also some administrative fees involved. For example, a $235 fee for case filing and a $75 fee to cover miscellaneous administrative expenses.
Chapter 13 Bankruptcy Process
You may want to read our more in-depth article on the Chapter 13 bankruptcy process, but we’d like to provide some information here. The Chapter 13 and Chapter 7 Bankruptcy code are designed to provide provisions for anyone that is facing a cash crunch. However, Chapter 13 bankruptcy is the one most people opt for when they want to avoid foreclosure on their homes.
So here is how it works. If you have tried negotiating with creditors, but all else has failed, then perhaps your last resort should be filing for bankruptcy. While the Chapter 7 bankruptcy code forces you to do away with your assets in order to settle your debts, Chapter 13 lets you keep your belongings.
Pursuing this option is a good idea when creditors start forcing you into a corner by filing lawsuits or attempting to repossess your belongings. However, keep in mind that filing for bankruptcy will severely hurt your credit score and maintain it like that for at least ten years. Filing bankruptcy under Chapter 13 provides you with more time to pay off the debts.
The process of filing for Chapter 13 bankruptcy is quite elaborate.
- The debtor begins by filing a bankruptcy petition with a bankruptcy court near him/her.
- He/she will also be required by the court to file his/her assets and liabilities.
- The debtor should also provide his/her income and expenditures schedule to the bankruptcy court.
- A schedule of unexpired leases and executory contracts should also be provided.
- The debtor must provide a statement of financial affairs.
A filing must also accompany the above requirements for credit counseling as well as any evidence to prove payment from employers. The debtor should also provide tax return transcripts to his/her trustee who is supposed to handle any dealings with the creditors.
The Chapter 13 Bankruptcy Plan and Confirmation Hearing
A debtor is required to come up with a repayment plan which he files bankruptcy. This filing can be made together with an extension petition if the court does not award the extension at first. It can also be filed within 14 days after the filing of the petition. The payment plan should show fixed payment plans that will be sent to the trustee. These fixed payments can be sent bi-weekly or on a monthly basis. The trustee is supposed to distribute the funds to the creditors, as indicated in the payment plan.
Chapter 13 bankruptcy code protects the debtor, so that he/she does not have to lose vital property. For example, a house. In case the debtor owns a business, the disposable income that comes from the business is included in the payments to creditors as per the payment plan. However, the debtor’s operating expenses are left alone, especially those that are vital to the running of the business.
The debtor is supposed to start making payments to the trustee within 30 days after filing for bankruptcy under Chapter 13. These payments are required even if the court has not yet approved the plan. The trustee should start distributing the funds to the creditors as soon as the court approves the plan.
In case the court turns down the plan, then the debtor must come up with a modified plan. This modified plan is also filed with the court. The debtor also has the option of converting the case into a Liquidation case. If the second plan is turned down, then the trustee is authorized to return the funds to the debtor while deducting a small sum to cover the costs involved.
How to be successful in a Chapter 13 Bankruptcy
The debtor and all the creditors involved are bound to the provisions indicated in the plan that’s approved by the bankruptcy court. Once the plan is confirmed, then the debtor is tasked with making sure that the plan is fully realized. The debtor is obligated to send regular payments to the trustee. Note that the debtor is not allowed to accumulate new debt without notifying the trustee during the bankruptcy period. This is because new debt might derail the debtor from his initial plan.
The debtor may choose to have the payments deducted directly from his/her payroll. The upside is that this decreases the chances of defaulting, meaning the payments will be made on time. In case the debtor fails to make payments as indicated in the plan, then the bankruptcy court may liquidate the case and dismiss it as per the bankruptcy code. The case may also be dismissed or converted into liquidation if the debtor is unable to pay the domestic support commitments that are involved after the filing. These include alimony or child support. The same fate may befall the debtor’s case if he/she fails to submit tax filings as the case goes on.
Chapter 13 Discharge and completion
Discharge as per the Chapter 13 Bankruptcy code is a complicated affair, and it went through some changes recently. The debtor is supposed to consult legal counsel before filing under Chapter 13. Individuals are discharged from the bankruptcy status immediately upon finalizing all the payments as indicated in the payment plan. The debtor has to confirm that domestic support obligations involved in the filing prior to the certification have been cleared.
The debtor should also not have been discharged in a previous case in which a filing was made within a particular duration. Two years if it was a Chapter 13 case and four years if it involved Chapters 7, 11, and 12 filings. Prior to being discharged, the debtor is also supposed to have gone through and completed a financial management course.
Other things to consider
The bankruptcy court does not approve a discharge prior to determining whether there are incomplete procedures that may stand in the way as far as the debtor’s homestead exemption is concerned. If a debtor that had filed for bankruptcy under the Chapter 13 code receives a discharge, this means that they have cleared all the debts that were highlighted in the payment plan presented in the filing. Therefore, the creditors that were listed in the Chapter 13 bankruptcy filing can no longer demand payment from the debtor unless it is a post-bankruptcy transaction.
Keep in mind that the Chapter 13 Bankruptcy filing does not discharge some debts. They include long term debt obligations such as education loans, specific taxes, alimony, child support, and mortgages.
There is also the Chapter 13 Hardship Discharge. This discharge describes a situation where the debtor requests the court to grant him/her a discharge if the debtor is unable to complete the plan. This may happen when the plan is confirmed, but the debtor is unable to complete the plan due to various circumstances. For example, a debtor might be unable to pay due to circumstances beyond his/her control. It may be due to illness or injury that leads to insufficient funds to pay off the remaining debt.