Chapter 13 bankruptcy allows you to hold on to your property but you must repay all or a part of your debts over three to five years. It is different from Chapter 7 bankruptcy in which you get most of your debts cancelled but may have to give up property so that your creditors can be repaid. A Chapter 13 bankruptcy is sometimes referred to as a reorganization bankruptcy since you wind up repaying your debtors over time.
Who is Eligible for Chapter 13?
This type of bankruptcy is not available to everyone. Under Chapter 13, you will be required to repay all or part of your debts using your income. You will therefore have to prove to the court that your income is enough to allow you to make the payments. The court may consider you ineligible if you do not have an adequate income.
If you have too much debt, this too can make you ineligible. You cannot have more than $1,149,525 in secured debts or more than $383,175 in unsecured debts. Secured debts allow creditors to take certain possessions if you fail to pay the debt. Creditors do not have this right with unsecured debt. A credit card bill is an example of unsecured debt.
Filing for Chapter 13 Bankruptcy
Prior to filing for bankruptcy, you must get credit counseling from one of the agencies that the United States Trustee’s office has approved. A list of approved agencies is available at the Trustee’s website at www.usdoj.gov/ust on the Credit Counseling and Debtor Education page. The listed agencies are permitted to charge for their services but they must provide counseling free or at a lower rate if you are unable to pay. Additionally, you will have to pay the $310 filing fee and file various forms.
Repayment Under Chapter 13
Your repayment plan is your most important piece of Chapter 13 paperwork. It will provide details on the way in which you will repay your debts and how much you will repay. This plan has no universal form and many courts have their own forms.
The Amount You Will Have to Pay
There are certain debts that your Chapter 13 plan must repay in full. These debts are considered important enough to be prioritized over other debts and are thus called “priority debts.” Child support and alimony are examples of priority debts along with wages owed to employees and tax debts. Also, your repayment plan will have to include your payments on secured debts like your car loans or mortgages. If you have fallen behind on your debts, you will have to pay the amount you need to catch up.
Your repayment plan must show that your leftover income after making payments on the priority debts is being used to pay your unsecured debts, like your credit card or medical debts. In many cases, you will not have to repay these debts at all or you may only have to repay a part of them; however, you need to show that you are using your disposable income to repay them.
Length of Your Repayment Plan
Your earnings and your debt both determine the length of your repayment plan. If the average of your monthly earnings over the six months before you filed bankruptcy is above your state’s median income, you will have to go with a five-year plan. If it is below the median, you can go with a three-year plan. You can find out your state’s median income at United States Trustee’s website (www.usdoj.gov/ust); click on the “Means Testing Information” link.
Unable to Make Payments
If you find yourself out of a job six months into the Chapter 13 repayment plan or are unable to complete it for some other reason, the bankruptcy trustee may adjust it. You may also get your debts discharged by the court due to hardship. Types of hardship include the sudden closing of an employer’s business or illness that makes it impossible to work.
If you cannot get a modification to your repayment plan or a discharge due to hardship, you may be able to switch to a Chapter 7 bankruptcy or ask to have your Chapter 13 case dismissed. Note that if you get your case dismissed, you will still owe your creditors and your debts will include any interest that was not charged because of your Chapter 13 case.
Are You Considering Filing For Bankruptcy?
If you feel bankruptcy is the best option for your financial situation you need to speak with an experienced bankruptcy lawyer as soon as possible. Please contact us online or call our Vienna, Virgnia office directly at 703.991.7978 or our Rockville, Maryland office at 301.637.5392 to schedule your free case consultation.