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What is Chapter 13 Bankruptcy?

In Chapter 13 bankruptcy, the debtor is essentially going to the court and asking them for permission to reorganize their liabilities into one lump sum payment. The debtor will take all of their unsecured liabilities as well as any arrearage on their home or automobiles, pile them all together, and propose to the bankruptcy court a plan of repayment. That plan of repayment usually last between 3 and 5 years and when the plan of repayment is over with, the debtor is discharged of all of his or her remaining liabilities. Chapter 13 Bankruptcy is the best option for people who are behind on their homes and about to be foreclosed, have cars that are about to be repossessed, have back child support, back taxes, and even unpaid school loans. View the chapter 13 video above, where an experienced professional explains exactly what Chapter 13 bankruptcy is.

Chapter 13 bankruptcy rules are a little different than other types of bankruptcy. When someone files for bankruptcy under Chapter 13 of the Bankruptcy Code, their aim is to have the opportunity to repay some or all the debts in their name, in better terms, i.e. lower or no interest. Unlike Chapter 7 which involves liquidation of assets, the Chapter 13 process involves restructuring debts which allows the debtor to use whatever income they may have in the future to pay off the creditors. Filing Chapter 13 Bankruptcy is thus applicable for a debtor who has a regular income, and can afford to request for such adjustments or reductions.

The United States Bankruptcy Code gives the debtor a ceiling of 5 years, within which the creditors must be paid back. While the attorney will safeguard your interests, the entire process is carried out under the supervision of the courts.

Eligibility Requirements for Chapter 13 Bankruptcy

  • A debtor must live in the United States.
  • A debtor must be an individual. Chapter 13 bankruptcy is not available for a corporation, partnership, or other entity.
  • A debtor must have reliable income that exceeds their monthly expenses. This extra income, known as disposable income, must exist in order to work out some form of repayment plan to which the debtor's creditors will agree.
  • A debtor's unsecured debts (e.g., credit cards, personal loans) must not exceed $360,475 and a debtor's secured debts (e.g., home loans, automobile loans) must not exceed $1,081,400.
  • In the previous 180 days, a debtor cannot have had a previous bankruptcy dismissed.
  • In the previous 180 days, a debtor must have attended a credit counseling course from an approved agency.

There is a different set of requirements in order for a debt to file under Chapter 7 of the bankruptcy code.

What is the Chapter 13 Bankruptcy Repayment Plan?

Chapter 13 Bankruptcy or wage earners’ plan allows individuals with a regular income to create a 3 to 5 year bankruptcy repayment plan to repay all or part of their debts. The laws governing Chapter 13 bankruptcy can be found in Chapter 13 of the bankruptcy code also know as Title 11 of the United States code.

Chapter 13 Bankruptcy is available to all U.S. citizens; however, certain eligibility requirements must be met. A debtor’s outstanding unsecured debts must be less than $307,675 and secured debts must be less than $922,975. Credit counseling must also be completed within 180 days prior to filing Chapter 13 Bankruptcy.

How does the Chapter 13 Bankruptcy Plan work?

Payments are made directly to an assigned trustee who administers the case either through automatic payroll deductions, money orders, or checks. The trustee is responsible for paying the creditors until the plan requirements are complete. Disbursements must be made "as soon as is practicable" by the trustee after the court confirms the debtor’s plan.

The goal of the Chapter 13 bankruptcy plan is to allow the debtor to satisfy their debt obligations owed to most if not all of their creditors. A creditor has the right to provide input in regard to the development of the repayment plan.

-The bankruptcy petition is an official form filed by the person who wants to begin the bankruptcy process.

If the information we provided you on the Chapter 13 Bankruptcy Repayment Plan did not answer your specific questions, please contact us at 1-800-859-0844 or by completing our online form.

Chapter 13 Bankruptcy Means Test

The length of your bankruptcy repayment plan is determined by this Means Test. Debtors who file Chapter 13 Bankruptcy must complete Form B22C. This form allows the debtor to calculate their average monthly income for the 6 month period prior to the month before filing their Chapter 13 Bankruptcy.

Form B22C helps the debtor calculate the amount they must pay in their Chapter 13 Bankruptcy and the length of the repayment plan (either 3 or 5 years).

The means test calculates the debtor’s median income for a household. If their median is below the standard, they can repay their debts in 3 years. If their income is higher than the median standard, they can pay their debts in five years.

Under certain conditions, the court may allow below median income debtors to increase the length of their plan. Above median income households may also shorten their plan payment period if they pay 100 percent of the debts owed to their general unsecured creditors.

See our Bankruptcy State Law pages to get a better understanding of the Means Testing in your State.

Understanding the types of debt addressed in Chapter 13 Bankruptcy

Debts included in the plan include priority, secured and unsecured debts. Priority debts are given special status and include the costs of the bankruptcy and taxes. Secured debts include those which are backed by property or collateral and unsecured claims are those which are not backed by collateral or property which can be repossessed to pay the debt obligation.

Creditors who wish to receive payment for outstanding debts must file a Proof of Claim. Objections can be made by the debtor to the creditor claims. Creditors must respond to objections within 30 days in writing and if they do not, the claim is modified according to the objection or rejected. Judges may hold hearings to review the creditor responses, and the debt is considered valid unless the debtor can provide proof to discredit the claim.

What debts must be paid under the bankruptcy repayment plan?

  • Administrative Expenses – Administrative expenses include money owed to a non-creditor for the administration of the bankruptcy case. These obligations are paid first and include payment for the trustee (3% to 10) and the bankruptcy attorney.
  • Priority Creditors – Although priority creditors do not have secured interest to the debtor’s property, they are paid in full. Prior child support and spousal support, certain tax debts, wages, commissions, salaries, and contributions to employment benefit plans can all be considered priority debts.
  • Secured Creditors – Secured debts include debts backed by collateral or property: home equity loans, loans for personal property and home mortgages. Other debts which must be paid include statutory liens, judicial liens, and tax liens. The Chapter 13 debtor must either surrender the collateral or property back to the secured creditor, or they can repay the secured debt over the life of the plan.
  • Unsecured Creditors – Unsecured creditors do not have a security interest or collateral that they can repossess for debt payments. Unsecured debts include debts for medical bills, credit card debts, and certain unsecured personal loans. Unsecured creditors are paid after all other creditors are paid, and they are rarely paid in full. After the repayment plan is completed, any balances not paid in the plan are discharged.

The Chapter 13 Bankruptcy plan must be created and proposed in “good faith.” It also must be in the best interest of the creditors, giving unsecured creditors as much money as they would have received if the debtor had filed a Chapter 7 Bankruptcy. The Chapter 13 Bankruptcy plan must also provide full payment of priority claims and payment for the value of other secured claims.

Additionally, unsecured creditors must receive an amount of payment equal to the debtor’s monthly disposable income (the formula varies for those whose income is below or above their state’s median income).

The Confirmation Hearing for the Chapter 13 Repayment Plan

Within 45 days from the 341 Meeting of the Creditors the bankruptcy court must schedule and hold a confirmation hearing to determine if the Chapter 13 Bankruptcy plan meets the standards established under the U.S. Bankruptcy Code and if the debtor can meet the payment schedule.

A twenty-five day notice will be given to all creditors, and creditors may make objections to the plan. Objections vary but generally are made by creditors to challenge the amount of the debt payments scheduled under the plan.

Modifying a Chapter 13 Bankruptcy Plan in Court

Plans can be modified if circumstances arise (job loss or severe health condition) which does not allow the debtor to continue to make their Chapter 13 Bankruptcy plan payments.

In some cases bankruptcy plan payments may be lowered or the court may allow the percentage paid to creditors to change if they determine the debtor no longer has the income to fund the amounts the court originally confirmed.

All plan changes must meet the standards established under bankruptcy law. Under certain conditions plan payments must be increased. For instance, the court may increase the required payments if the debt claims, which are confirmed, are higher than originally estimated.

Plans may also be modified, either before or after acceptance, if the debtor failed to list all of their creditors. Modifications can be requested by the debtor, the trustee or a creditor.