This week we’re wrapping up our “What Happens When” series with an in-depth look at Chapter 13 bankruptcy. Previously in our series, we covered Chapter 7 and Chapter 11 bankruptcies. Chapter 13 bankruptcy is one of the most common forms of personal bankruptcy and can be a good choice if you’re struggling to make debt payments but have regular income and assets you want to hold on to.
Is Chapter 13 Bankruptcy Right For You?
Chapter 13 bankruptcy allows you to pay off your debts in three to five years using a plan that has been approved by the court. In order to qualify for Chapter 13, you must prove that you have the ability to repay your debt and that your debt is not more than $1,149,525. Filing for bankruptcy under Chapter 13 allows you to make one monthly payment for all your debts while lowering the overall payment. Generally, dealing with your creditors and the court to establish the terms of this payment is a complex process requiring the help of a bankruptcy attorney.
Your bankruptcy attorney will help you with the specifics of your case, but in its simplest form, Chapter 13 bankruptcy is completed in five steps: Preparation, Filing, Repayment Plan and Confirmation Hearing, Making Payments and Discharge of Debt. As you move through the stages, you’ll be researching and collecting information on who you owe money to, explaining your situation to the Bankruptcy Court using their forms, meeting with a trustee to finalize what debts will be included in your bankruptcy and, finally, having your debts officially discharged.
Step One: Preparation
Just like in a Chapter 7 filing, Chapter 13 bankruptcy requires a lot of paperwork. Your bankruptcy petition will include a financial statement, your current income and expenses, a list of everything you own and all of your debts and any outstanding contracts or leases. Since Chapter 13 bankruptcy involves repaying debts, you and your attorney will work together to create a repayment plan that the bankruptcy court will approve. Your bankruptcy attorney will help you figure out what you need to gather and how to prepare your documentation.
Step Two: Filing
Remember, once you file your petition for Chapter 13 bankruptcy, your creditors can no longer contact you or take any action against you—including foreclosure. Unlike in Chapter 7, you will almost always keep your assets. After filing, a trustee will be appointed to your case. It will be the trustee’s job to collect your debt payments and distribute them to your creditors.
Step 3: Repayment Plan and Confirmation Hearing
Within 14 days of filing your petition, you’ll file the repayment plan for court approval. The plan must show payments of fixed amounts to the trustee on a regular basis, typically bi-weekly or monthly.
Sometime within one or two months of filing, your trustee will hold a meeting for you and your creditors. You are required to attend and answer questions under oath. Your bankruptcy attorney will help you through this, and any problems with the plan should be resolved during or shortly after this meeting. Finally, you’ll attend a hearing where the court will confirm your plan.
Step 4: Making Repayments
Within 30 days after filing the bankruptcy case, even if the plan has not yet been approved by the court, you must start making plan payments to the trustee. Once the court confirms your plan, you must continue making regular payments to the trustee who distributes the funds according to the approved plan.
Step 5: Discharge of Debt
If for any reason, you aren’t able to make payments over the course of the three to five years, a Chapter 13 bankruptcy can be converted to a Chapter 7. If the situation is temporary, you may be able to obtain a modification of your repayment plan. When the court is satisfied you’ve completed the repayment plan, and complied with the education requirements, your bankruptcy will be discharged.