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Debt has become a significant part of most people’s lives, but sometimes things get out of hand. Fortunately, the law has provisions that are designed to protect people in such situations. One of those provisions is the Chapter 13 Bankruptcy code, which offers debt adjustments for those with regular incomes.

Chapter 13 Introduction:

The Chapter 13 Bankruptcy code is a vital tool for individuals that have a large amount of debt because it allows them to protect their properties from foreclosure. Anyone that files for Bankruptcy under Chapter 13 is, therefore, able to use it to manage the situation at times where debt has piled up too much.

Chapter 13 bankruptcy provides a chance for individuals to reorganize their secured debt aside from their mortgage for their main home. It allows them to lower their debt payments during the agreed upon duration as filed. It 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 trustee) to the process allows the pressure off the debtor since the 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. It is supposed to provide options that make it easier for the debtor to pay off his debts, and that is why consolidation and trustees come into play.

Chapter 13 Advantages:

Chapter 13 Bankruptcy guidelines offer numerous advantages that make it quite appealing and useful to anyone that might be planning to file for bankruptcy.

  • It protects the debtor from home foreclosure. It might be the most advantageous aspect of the Chapter 13 bankruptcy code because a home is perhaps the most valuable possession for most people and it is would be quite an unfortunate situation if one ended up losing 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 finish the repayments. Most of the people facing bankruptcy are therefore, 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 such as upkeep and paying off bills.  
  • Third party protection- The Chapter 13 bankruptcy codeis 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 Disadvantages:

There are some downsides to filing for Chapter 13 Bankruptcy. For example, once you go down this road, your credit score will be negatively affected. On the flip side, it only impacts your credit score for a period of ten years, after which you can work on improving your credit score.

The other disadvantage is that the Chapter 13 Bankruptcy filing process is quite intensive and may take years to finalize. There is also the drawback that it has on any extra sums of money that the debtor receives during the bankruptcy period. This means that the any salary increment that the debtor receives will be handed over to the trustee.

Chapter 13 Eligibility:

Not everyone that is approaching bankruptcy can file under Chapter 13, and 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 $394,725 in unsecured debt and if their secured debt is below $1,184,200. 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 that fail to show up in court within 180 days before filing a bankruptcy petition or if they do not comply with the court orders regarding their filing.  Individuals will also not be allowed to file for bankruptcy under Chapter 13 if they fail to attend credit counseling within 180 days before filing for bankruptcy.

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 debt counseling duration, preferably with help or guidance from the selected debt counseling firm.

How Chapter 13 Works:

To successfully file for Chapter 13 bankruptcy, individuals are required to kick the process by filing for a petition with a local bankruptcy court. The individual will also be required to provide personal financial details such as unexpired leases, incomes, and expenditures, also, 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 fines involved such as a $235 fee for case filing and a $75 fee to cover miscellaneous administrative expenses.

How Chapter 13 Works: Let’s Go Through It Step By Step

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 that 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 to 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.
  • The debtor 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 Plan and Confirmation Hearing

A debtor is required to come up with a repayment plan which he files with the bankruptcy bank. 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 either 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 such as 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 even before the court approves 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 which he/she then files 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.

Chapter 13: How to be successful

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 a legal counsel before filing under Chapter 13. Such an individual is discharged from the bankruptcy status as soon as they finalize 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, mainly 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.

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. This also means that 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 a The Chapter 13 Hardship Discharge, which is 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.

References:

https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics

https://www.wikihow.com/File-for-Chapter-13-Bankruptcy

Post Author: Ascend

Ascend is a group of guest writers and industry experts who are passionate about personal finance and about helping people get and stay out of debt.

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