WHY FILE A CHAPTER 13 BANKRUPTCY?

 

The difference between filing chapter 13 and Chapter 7 is: Chapter 13 bankruptcy enables you to retain assets that would be liquidated in Chapter 7.  You could keep your home and car under either plan if your equity does not exceed certain limits. Under Chapter 7, you won't be able to keep rental properties, antique collections, etc. which you can retain under chapter 13.

Consumers with debts exceeding the Chapter 13 bankruptcy law debt limits and businesses can file Chapter 11 -- a lengthy, expensive process. In any reorganization bankruptcy, you file a plan or chapter 13 form with the court proposing how to repay your creditors. Some debts must be repaid in full, partially repaid, or not paid at all while others must be paid with interest, paid at the beginning, or paid at the end.  All must be scheduled with the name and address of the creditors, allowing them to receive notice of the chapter 13.  This is standard of chapter 13 bankruptcy law.

Sometimes debtors omit a creditor because they want to continue paying the debt. This violates Chapter 13 law, and is unnecessary, because a debtor can always voluntarily pay a debt, even though it has been discharged with no legal obligation to pay. Creditors are prohibited by chapter 13 bankruptcy law from collecting on discharged debts.  This is stated under law 11 U.S.C. § 1301.  If a creditor listed in the schedules attempts to collect a debt, the debtor should inform them a chapter 13 form has been filed and request they cease collection.

Filing chapter 13 is for people who have a lot of non-dischargeable property or too much income to file a chapter 7.  Chapter 13 is for consumers or small businesses wanting to repay their creditors while protecting their real estate and personal property and avoiding harassing collections efforts. You cannot file a Chapter 7 if you have filed a 7 or chapter 13 bankruptcy within the past 6 years (unless you paid off 70% of your unsecured debts when previously filing chapter13). However, you can file a Chapter 13 form any time.

Filing chapter 13 is a lengthy process.  Each state has its own exemption limit.  Chapter 13 bankruptcy begins with the filing of forms in the court serving the area where the debtor resides.

A trustee proposes a 3-5 year plan to creditors where the debtor repays part of his debts out of future income.  Chapter 13 law states that a plan lasts no longer than five years (chapter 13 bankruptcy law 11 U.S.C. § 1322(d)).  To complete a chapter 13 form, the debtor needs to compile the following information: 1. A list of all creditors and their claims; 2. The source, amount, and frequency of the debtor’s income; 3. Complete list of the debtor’s property; and 4. A detailed list of the debtor’s monthly living expenses, i.e., food, shelter, utilities, taxes, transportation, medicine, etc. 

 

This chapter 13 bankruptcy information allows the trustee to calculate your affordable monthly payments when considering your living expenses, income, and disposable income.   You must live under a strict budget; the court will not allow you to spend money on anything it deems nonessential.  The debtor’s employer can withhold the payment from the debtor’s paycheck and transmit it to the chapter 13 trustee.

The debtor is examined under oath at a meeting of creditors. This occurs both 20 and 50 days after filing a chapter 13 form. If the United States trustee or administrator designates a meeting place that is not staffed by the United States trustee or administrator, it may be held before 60 days after the order for relief, according to law.  The debtor attends the meeting where creditors ask questions about the debtor’s finances and proposed terms of the plan, as stated in chapter 13 bankruptcy law 11 U.S.C. § 343. 

 

Filing chapter 13 allows for car and mortgage payments in the chapter 13 plan. The creditor may be required to accept these payments instead of proceeding with foreclosure or repossession. You have to keep making your house payments and/or car payments throughout the 3-5 year chapter 13 bankruptcy period or you must foreclose or sell.

Filing chapter 13 may be the best option for the following situations: You have substantial secured debt that you want to retain and it cannot be discharged in Chapter 7 bankruptcy due to limited state exemptions; Someone co-signed a loan and would be responsible for it if you filed Chapter 7; or you have an IRS obligation or student loan that can only be discharged in Chapter 13.


In a Chapter 13 filing you repay at least 50% of your debts.  Chapter 13 does not stay on your credit as long as a Chapter 7.  A chapter 13 could stay on your credit report for up to ten years from the day you file.  Yet, rarely is a Chapter 13 reported for more than seven years.  Issuers of credit consider your chapter 13 filing in deciding whether to extend credit. Some lenders may extend credit only after a number of years have passed, or only after the chapter 13 bankruptcy falls off your credit.

The problem with a chapter 13 filing is that you may end up repaying 50% or more of the debt, in some states the entire amount, and be forced by the courts to make the payments. If you miss a payment you could end up in breach of court and be forced to repay the whole debt. You can stop collection efforts by filing chapter 13 but why tie yourself into making payments by the courts? 

 

Unfortunately, the majority of debtors never complete their repayment plans.  While most filing chapter 13 bankruptcy assume they'll complete their plan, only about one third of all debtors do. Many drop out early in the process, without submitting a feasible repayment plan to the court.

In some cases, filing may be necessary.  However, as you can see from the information presented, it should be avoided, if possible.  A competent debt resolution company can help reduce your debts so you don’t have to proceed with filing chapter 13 bankruptcy. 

* We are not attorneys and this information should not be construed as legal advice.  This website is for informational purposes only.