How to File for Chapter 13 Bankruptcy
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If you’ve fallen behind on your mortgage payments or other debts, filing for Chapter 13 bankruptcy may be a viable way to settle your debts, keep your property and get back on solid financial ground.
Also called a wage earner’s plan, Chapter 13 is best suited for individuals with regular income that they can use to make scheduled payments to creditors through a court-approved plan over three to five years.
Consider some possible scenarios where Chapter 13 bankruptcy could be an option:
- You’ve had an injury or illness that temporarily sidelined you from work. Even though you’re back at your job, you’ve missed mortgage and car payments and face past-due medical bills.
- You’ve been through a divorce or death of a spouse. Without the same household income, you’ve been unable to make on-time payments.
- You’re still employed, but your household income has dropped. You face mounting debt.
“Almost all Chapter 13 filings are brought about by either repossession of a vehicle or threatened foreclosure of residence,” explained John Thomson, an Atlanta-based bankruptcy attorney for Adams and Reese LLP. “It is often a wake-up call that borrowers have that they have to do something.”
Once a Chapter 13 petition is filed, it freezes all foreclosure and collections, offering individuals some protections. Individual circumstances vary. Each state has its own bankruptcy statutes, so it is important to consult with a licensed bankruptcy attorney in your area.
“Every household lives their life differently. Chapter 13 is so very, very fact sensitive,” said James Aaron, an Ocean Township, N.J.-based bankruptcy attorney and partner at Ansell Grimm & Aaron. “The job of a good bankruptcy attorney is to assemble a plan within the construct of the law and work with the court, the trustee, the creditors and their client to get the best result possible.”
In this article, we will review:
How Chapter 13 bankruptcy works
In the U.S., bankruptcy law is designed to resolve the debts of individuals who can’t make regular payments – or any payments. The two types of bankruptcy for individuals are Chapter 13, which is a court-approved repayment plan, and Chapter 7, which is a discharge of outstanding debt. Along with federal bankruptcy laws, some states have additional codes or restrictions, so it is important to familiarize yourself with your local bankruptcy rules and statutes.
Chapter 13 vs. Chapter 7
Among the most important differences: By filing for Chapter 13, a homeowner can halt any foreclosure proceedings on their house and work toward paying down outstanding payments. Under Chapter 13, an individual makes a monthly lump-sum payment to a court-approved trustee, who disburses the funds to creditors under the terms of the bankruptcy plan.
Once a Chapter 13 plan has been filed, an individual is shielded from any collection actions by creditors, including foreclosure, wage garnishments, lawsuits and intrusive phone calls – so long as they make scheduled payments to the trustee. Chapter 13 protection lasts for three to five years, depending on your income and your repayment plan.
An individual is eligible for Chapter 13 protection as long as their secured debts — which are tied to an asset such as a house, land or vehicle — do not exceed $1,184,200 and their unsecured debts — which could include medical expenses or credit card bills — are less than $394,725. (These amounts are set by the federal government and are subject to change).
In contrast, a Chapter 7 bankruptcy is a liquidation of assets to satisfy creditors and a discharge of most debts. Candidates for Chapter 7 typically do not have disposable income and make less than the state median household income. As part of the process, a court-appointed bankruptcy trustee inventories all of an individual’s assets and liquidates them to pay off creditors, including potentially their home, vehicles and other property.
How to file for Chapter 13
To file for Chapter 13, individuals or married couples need to follow a process that is laid out by the courts. It requires detailed paperwork and a plan:
- Consult with a bankruptcy attorney to review options.
- Get the required paperwork to file for Chapter 13.
- Prepare the necessary documents, complete the paperwork and pay the filing fees to the court.
- Enroll in and complete the first phase of credit counseling, then submit the certificate of completion to the court.
- Meet with a court-appointed trustee to review the proposed budget and payment plan for the creditors, and file a petition with the court. Once the petition is filed, all creditors freeze any actions on debtors’ property, including foreclosure on homes.
- The bankruptcy clerk notifies all creditors whose names and addresses are provided by the debtor.
- Between 21 and 50 days after filing, the trustee will hold a meeting of creditors. Within 30 days after the petition is filed, the debtor must start making payments, even if the court hasn’t approved the plan.
- The trustee submits the petition to creditors for approval. Within 45 days, the bankruptcy judge approves, amends or objects to the plan.
- Once the plan is confirmed, the trustee will begin transmitting payments to creditors. If the petition is denied, the debtor may refile or seek to modify under Chapter 7 bankruptcy.
To file for Chapter 13 bankruptcy, an individual must complete court-mandated paperwork and file a petition. Those actions are accompanied by a standard fee of $235 for filing the case and a $75 administrative fee, which must be paid upon filing.
The process also requires two credit counseling sessions, of which you have the option to complete online. You must submit your certificate of completion to the court. One session must be completed within 180 days before filing, while the other must be done before discharge.
If you are considering filing for Chapter 13, it is recommended that you consult with a licensed bankruptcy attorney who can review your file and suggest a course of action. State and local bar associations or nonprofit legal services organizations can recommend experienced attorneys, and you can also get information online and referrals from friends and family. Some attorneys will provide free consultations before taking on bankruptcy cases.
To file for Chapter 13, you will need to prepare the following documents, which bankruptcy attorneys will likely want to review as well:
- A list of all creditors, the amounts owed and details of claims or bills
- Sources of income, amounts and frequency
- Detailed list of all property and assets
- Detailed list of monthly expenses, including food, clothing, housing, utilities, transportation, medical necessities and taxes
To propose a plan, a bankruptcy attorney will review their client’s income, assets and expenses, and propose a monthly amount to the trustee, who in some cases is an employee of the court. Each state has restrictions and exceptions, so it is important to speak to someone knowledgeable, said Seattle-based bankruptcy attorney Richard Symmes, of Symmes Law Group.
Once a trustee, creditors and the debtor agree on a payment plan, a judge must sign off, and then the debtor makes one monthly payment to the trustee, who releases money to the creditors based on the plan. Chapter 13 protections are in place for three to five years, based on your income compared to state median incomes.
When that term expires, a trustee will review your status. If all debts have been paid according to the plan (including up-to-date child support, alimony and tax payments) and the individual completes their second credit counseling course, the court will approve a discharge.
This releases the debtor from all remaining debts, with a few notable exceptions:
- Remaining long-term obligations
- Debts for alimony or child support
- Debts for most government-backed student loans
- Overpayment of government benefits
- Debts tied to settlements related to death or injury caused by driving under the influence
How Chapter 13 impacts your credit
After a Chapter 13 bankruptcy, an individual may emerge with a stronger financial profile than before they filed, or compared to someone who is discharged from Chapter 7. Under federal law, credit reporting agencies may not report a bankruptcy case on a credit report after 10 years from the date it was filed. Beyond that, it is up to the individual credit agencies to decide what information they include. Since bankruptcy filings are public record, that information is available.
Because Chapter 13 is a reorganization, you’ll be making regular payments to creditors and repaying some — if not all — of your outstanding debts. You can hold on to some or all of your assets, including your home. In contrast, with a Chapter 7 bankruptcy, a debtor liquidates their assets to satisfy as much of their debts as possible, and much of their outstanding debt is discharged.
“When you get discharged from Chapter 13, your debt goes to zero, so many people actually improve their credit,” noted Symmes.
While both bankruptcy filings can appear on a credit report, someone who emerges successfully from Chapter 13 might get some preferable consideration from lenders, Aaron said.
“[The] continuation of paying bills is a sign that lenders will loan you money, but you may be penalized … because of additional risk that lenders think they’re taking on someone who has filed for bankruptcy,” he said.
After a successful discharge, creditors can no longer seek to collect debts that were included in your Chapter 13 plan.
What kind of debt can you get rid of?
If you complete your Chapter 13 plan, you may be eligible to discharge some or all of the remaining debts, subject to court approval. Within Chapter 13, there are three kinds of debt: priority debts, which must be paid above all others; secured debts, which are tied to an asset; and unsecured debts, which are unrelated to a physical item.
Priority debts, which can include child support, alimony, some student loans and some taxes, must be paid before all other debts in your plan and will not be discharged upon completion of the plan, according to the U.S. government.
For secured debts, such as loans for a house, vehicle, boat or recreational vehicle, a Chapter 13 plan works to satisfy outstanding payments and resume regular monthly payments. After completion, a portion or all of the remaining debt can be discharged. But if a debtor fails to make regular payments, you can be at risk for foreclosure or seizure of property again, Aaron said.
With unsecured debts, a trustee will include repayment in the monthly lump sum, allowing the creditors to recoup all or at least some of the outstanding amount. Within reason, many of these unsecured debts are discharged upon completion. Unsecured debts can be credit card balances, personal loans or medical and legal bills. You can also discharge some debts related to a divorce, such as joint credit card balances or legal fees.
To avoid future foreclosure, homeowners must continue to make their mortgage payments on time or the bank could restart proceedings. If the mortgage is more than a home’s value, a second mortgage can be discharged and not paid, Symmes noted.
Notably, outstanding student loans can be included in a Chapter 13 plan and serviced with regular payments during the term of the bankruptcy. Once a person is discharged, the court may determine that the remaining balance can be discharged or that an amount must be continued to be repaid. A student loan may be considered a priority payment during a Chapter 13 plan. Consult your attorney for options related to managing student loan debt.
Is Chapter 13 right for you?
A top reason to seek Chapter 13 bankruptcy is to avoid foreclosure or keep your home. If you’re motivated by a desire to reorganize your debt and hold onto assets and you have a regular income, a Chapter 13 bankruptcy might be right for you.
But there are some more factors to consider:
Fees can be high
Along with filing fees and the cost of credit counseling certification, individuals filing for Chapter 13 can expect to incur costs related to attorney fees and fees that are paid to the trustee. The court can set standard fees for attorneys and trustees based on the state and region. But the fees can cost you several thousand dollars. If a filing requires additional work, attorneys may require more billing.
For individuals who can’t afford the attorney fees, it may be possible to work with an attorney at a lower cost or no cost. To obtain these services, consider exploring the American Bar Association website.
Filing for Chapter 13 without a lawyer is possible. Resources are available online, but the government encourages individuals to seek counsel, as bankruptcy laws change frequently and are complex.
Consider your income
The higher your income, the more money your creditors will seek to recoup. So while your attorney may suggest a small monthly payment, the trustee may not accept that proposal and seek increased payments.
“The more income a debtor has, the more that is expected of them in the plan,” Aaron said.
Set a budget and stick to it
Under a Chapter 13 plan, debtors are expected to set a reasonable household budget and stick to it. That could mean forgoing luxuries and downsizing, which can be difficult for some people.
“If part of your living budget you put in is a vacation to Madrid every year, that’s not going to cut it with the trustee,” Aaron said. “If you’re willing to sacrifice and cut back and willing to work with creditors and within the court’s perimeters and trustee, [the] plan can be effectuated.”
If you can’t make your payments, you may be forced to part with luxury items. “Why should you keep a boat if you’re not paying medical bills?” Symmes said.
Filing for Chapter 13 is a significant decision, and debtors should consult with an attorney and carefully weigh their options. If this option is right for you, reorganization and repayment of debts on schedule can get you back on the path to financial stability.
“A successful plan is good for [the] trustee, good for the debtor and helps the creditors get paid in a timely fashion,” Aaron said. “That’s the best possible result.”
Fees mentioned above are accurate as of the date of publishing.