Chapter 13 bankruptcy is often referred to as debt relief for higher-income wage-earners. It is a rehabilitative bankruptcy or reorganization bankruptcy that allows a debtor with regular income to use a payment plan to repay all of their debts, including personal loans and government debts, over a three to five year period.Who might qualify for relief through a Chapter 13 payment plan? If your secured debts are less than $1,184,200 and unsecured debts do not exceed $394,725, Chapter 13 may give you the fresh start you need to regain financial solvency. However, there are often other factors that help determine which type of bankruptcy is best for your situation. It’s important to talk with a bankruptcy attorney to learn more about your options.
Why File Chapter 13?
The majority of indebted consumers file for Chapter 7 bankruptcy because it lasts only a few months, is comparatively less expensive, and allows them to enjoy a debt-free life more quickly. However, for many people, the simplest option is not the most appropriate one.
If you have a stable and healthy income and/or want to protect valuable assets, it may make more sense for you to file for Chapter 13 bankruptcy. In exchange for a discharge from your debts, you follow a three-to-five-year payment plan that uses your discretionary income to repay what is owed. This arrangement allows you to repay a portion of your debts and catch up on past due amounts for the following obligations:
- Your home, car, and other collateral-based loans (such as personal loans).
- Income taxes (including a reduction in penalties and interest owed to the IRS; however, you must be current on filing your taxes even if you owe).
- Domestic support obligations such as alimony and child support.
- Student loan payments.
Government entities receive 180 days to file claims to be examined and included in the payment plan. They are considered priority creditors. Unsecured creditors, such as most personal loans, only receive 90 days after the first date is set for what is known as the meeting of the creditors.
Is Chapter 13 Bankruptcy right for you? Watch this video to find out.
Other benefits of a Chapter 13 filing include:
- You receive bankruptcy protection if you make too much money to meet the Chapter 7 means test. While bankruptcy is based on federal law, the means test itself takes the cost of living for the state into account as well as the number of individuals in the family. In Oklahoma, one person in the household may earn up to $43,109 annually to file for bankruptcy; two people in the same household may earn up to $54,922; three people in the same household may have an income of $58,260; four people in the same household may have an income of $67,299; and for each person over that, an additional $8,400 may be added.
- Any co-signers on your personal debts are protected. They will not receive any harassing phone calls or letters from debt collectors because they will still be paid.
- You can keep assets that you might otherwise have been required to give up in a Chapter 7 case. There are only certain property exemptions in Chapter 7 bankruptcy. While certain states allow you to choose between federal and state exemptions, Oklahoma does not. If you file for Chapter 7, you are required to follow Oklahoma’s exemptions. This highlights the importance of a bankruptcy attorney when determining which of the two main types of bankruptcy may best benefit you.
- You can establish new terms for a car loan payment that is over 2.5 years old. Reaffirming the terms for your current car loan could mean that you reduce your interest rate or even lower your payment, depending on the facts in your specific case.
Renters and Chapter 13
If you are renting, Chapter 13 bankruptcy may still be an optimal decision. Filing for Chapter 13 begins an automatic stay. The automatic stay prevents your landlord from starting or continuing the eviction process against you. Any past-due rent that you owe to your landlord will be included in your repayment plan. However, to ensure that you are not evicted, you must make all of your on-going rent payments on time.
How Does Chapter 13 Repayment Plan Work?
Your monthly payment plan amount is determined by several factors:
- Your income. The payment plan is based on a three-to-five-year period that relies on what you can afford to pay after you’ve paid all of your necessary expenses. It takes your discretionary income and pays it to your creditors.
- How much you owe. Once your payment plan is submitted for approval and approved, you will pay off a certain amount of your debt over the three to five year period. Then, the remainder of your debt will be discharged.
- The nature of your debt. There are three types of debts: priority, secured, and unsecured. Priority debts include child support and alimony obligations, back taxes owed, and other governmentally backed debts (although some government loans may also be considered secure). Secured debts are debts that have collateral, such as a mortgage or a car loan. An example of unsecured debt is a credit card or a personal loan.
- Your necessary but reasonable expenses. Examples include your mortgage or rent payment, your car payment, and your utilities. These are the expenses that we all pay to live.
Most plans include provisions that allow you to pay less than the total amount owed (provided that such an arrangement is fair to both your creditors as well as to you) since the purpose of Chapter 13 is to repay some of what you owe as well as to help you make a clean financial start.
When you propose a plan, the bankruptcy trustee and your creditors will have the opportunity to review it and raise any objections. If all required changes are made, the bankruptcy court will likely approve the plan at a confirmation hearing if it meets the following criteria:
- It is feasible, meaning that you can afford the monthly repayments.
- You proposed it in good faith.
- It complies with bankruptcy law.
Your Chapter 13 plan must pay priority debts first. Examples include child and spousal support that you fell behind on and most tax debts. If you want to keep your home or car, you will have to continue making regular payments on the mortgage and car loans as well as repay any amount that you may have fallen behind on. Unsecured debts such as credit cards and medical bills don’t have to be repaid in full, but you must show a good faith effort in attempting to cover them in part.
Most Chapter 13 filers will have a five-year repayment plan. A three-year option is available to those who would normally qualify for Chapter 7 but opted for Chapter 13 instead. However, many people opt for five years because the monthly payment will be lower and therefore more sustainable.
Chapter 13 payments are made directly to the trustee each month. Payments may be made through payroll deduction to make it easier for you to ensure that the payment is made each month. The trustee makes the payments directly to the creditors. This helps ensure that the payments are properly distributed and credited both to your Chapter 13 payment plan as well as to each creditor in the proper order.
What if You Can’t Make the Payments?
Anyone can experience a sudden financial setback such as job loss or disability. There are options that you may be able to pursue if something happens during your Chapter 13 bankruptcy that causes you to no longer be able to afford your monthly payments.
If your income decreases, you may be able to modify the amount you pay to unsecured creditors. If the required debts become a challenge, you may be allowed a discharge due to hardship or be allowed to convert to a Chapter 7 bankruptcy case. The hardship discharge is only available if:
- Something happens that is outside of your control;
- Your creditors have received as much as they would have received had you filed for Chapter 7 bankruptcy; and
- Modifying the Chapter 13 payment plan simply isn’t feasible.
Examples of times when a hardship discharge is granted during a Chapter 13 bankruptcy include an illness or an injury that is severe enough to keep you from being employed. However, it is important to keep in mind that the discharge will not affect any debts that wouldn’t be discharged in Chapter 7. There is also specific documentation that must be completed to apply for a hardship discharge.
If the bankruptcy is converted to a Chapter 7, it may be done so as a means to discharge the remaining debts or to liquidate the remaining assets so that certain remaining debts may be paid. Depending on your situation, the conversion may also be to a Chapter 7 no-asset case, meaning that the trustee is not paying creditors any more money from your bankruptcy estate and you are simply receiving a discharge.
However, if you cannot make your payments, you must contact the trustee’s office or your bankruptcy attorney right away to let them know what’s happening. Don’t wait until the problem becomes more serious. Addressing the problem early shows the trustee that you want to fix it in good faith.
Concluding Your Chapter 13 Case
After completing your payment plan, you must demonstrate that you have completed the required budget counseling course and are current on any child or spousal support obligations. If you were successful, any remaining balance on dischargeable debts is eliminated, leaving you free to start anew.
You may notice that because you successfully completed your payment plan, that you get offers for secured credit cards as well as personal loans to help you “rebuild” your credit. Tread carefully while rebuilding your credit score. While Chapter 13 gives you a fresh start, you can only file for Chapter 13 bankruptcy every two years, and you’ll have to wait six years after your discharge before you can file for Chapter 7. This helps the federal court system eliminate the likelihood of individuals who want to abuse the bankruptcy process. Keep in mind that you worked hard for three to five years to finish your payment plan by using your discretionary income. So, think carefully as you slowly improve your credit reports and your financial future.
At the Law Offices of B. David Sisson, our goal is to guide you to a new and financially stronger life after Chapter 13 bankruptcy. We offer clients throughout Oklahoma personalized service, honest answers, and practical bankruptcy solutions that fit their lives. To schedule a consultation and determine if filing a Chapter 13 is right for you, contact us today. There’s no obligation. We want you to understand the bankruptcy process as well as to come away from the consultation educated and feeling more hopeful about your financial future!