Chapter 13 Debt Repayments

hapter 13 bankruptcy is often referred to as a “wage earner’s plan” because it allows individuals with a regular income to create a repayment plan to pay back all or a portion of their debts over three to five years. Here’s an overview of the debt repayment process under Chapter 13 bankruptcy:

Key Features of Chapter 13 Debt Repayments

1. Repayment Plan
   • Duration: The repayment plan typically lasts three to five years. The specific length depends on the debtor’s income relative to the state median income.
     • If the debtor’s average monthly income is below the state median, they may complete their plan in three years.
     • If the income is above the state median, the plan will usually last for five years.
   • Plan Submission: The debtor must submit a detailed repayment plan to the court for approval, outlining how they intend to pay off their debts.
2. Types of Debts Included
   • Chapter 13 can include various types of debts, such as:
     • Secured Debts: Mortgages, car loans, etc. The debtor can keep their property while making payments.
     • Unsecured Debts: Credit card debts, medical bills, personal loans, etc. Unsecured debts are often paid at a reduced amount.
   • Priority Debts: Certain debts must be paid in full during the repayment period, such as child support, alimony, and certain taxes.
3. Payment Structure
   • Monthly Payments: The debtor makes regular monthly payments to a bankruptcy trustee, who then distributes the funds to creditors according to the repayment plan.
   • Amount of Payments: The amount paid each month depends on the debtor’s income, expenses, and the total amount of debt. The court will review the plan to ensure it is feasible and meets legal requirements.
4. Protection from Creditors
   • Once Chapter 13 is filed, an automatic stay is enacted, which temporarily halts most collection actions, including lawsuits, wage garnishments, and foreclosure proceedings. This provides breathing room for the debtor to implement the repayment plan.
5. Court Approval
   • The proposed repayment plan must be approved by the bankruptcy court. The court will hold a confirmation hearing where creditors can object to the plan, although objections are not common.
   • If the plan is approved, it becomes a court order, and both the debtor and creditors must comply with its terms.
6. Modification of the Plan
   • If the debtor’s financial situation changes during the repayment period (due to loss of income or unexpected expenses), they may be able to modify the repayment plan. This requires court approval and is typically evaluated on a case-by-case basis.
7. Completion of the Plan
   • Upon successful completion of the repayment plan, the debtor receives a discharge of any remaining unsecured debts included in the plan. This means they are no longer legally required to pay these debts.
   • However, certain debts, such as student loans, some taxes, and child support, will not be discharged.
8. Consequences of Non-Compliance
   • If the debtor fails to make the required payments or comply with the terms of the plan, the bankruptcy court may dismiss the case or convert it to Chapter 7 bankruptcy. This could result in the loss of the automatic stay and creditors resuming collection actions.

Benefits of Chapter 13 Debt Repayments

• Retain Assets: Debtors can keep their property (e.g., home, car) while making payments, as long as they continue to make those payments.
• Flexible Repayment: The repayment plan can be adjusted based on the debtor’s income and expenses, making it more manageable.
• Discharge of Unsecured Debts: At the end of the repayment period, remaining unsecured debts are discharged, providing a fresh start financially.

Chapter 13 bankruptcy provides individuals with a structured repayment plan to manage their debts while retaining their assets. It allows for flexibility in payments and protects the debtor from creditor actions during the repayment period. For those considering this option, consulting with a bankruptcy attorney is advisable to navigate the complexities of Chapter 13 bankruptcy and create a feasible repayment plan.

What Makes You Eligible for Bankruptcy Under Chapter 13?

The advantage of this chapter is that you can use a three- to five-year repayment plan to pay off part, but typically not all, of your debts. However, you must complete the official bankruptcy papers and provide proof of the following before the court “confirms” (approves) your plan:

Current with tax returns while staying within debt amount restrictions
Employed, have sufficient income to meet the required monthly payment, and are an individual rather than a business (however a sole proprietor’s business’s finances are included in the bankruptcy).
You Must File Your Income Taxes Current.
You need to provide evidence that you submitted your state and federal income tax returns for the four tax years prior to the date of your bankruptcy filing in order to file for Chapter 13. The court may postpone the proceedings if you need more time to stay up to date on your files, but you shouldn’t rely on this. Ultimately, though, your Chapter 13 case will be dismissed if you fail to submit your returns or transcripts of the returns for those four years.

Find out why the court can reject your case.

You Need to Make Enough Money for Your Own Needs

In order to be eligible for Chapter 13, you must demonstrate to the bankruptcy court that you will have sufficient income to satisfy your repayment obligations after deducting certain permitted expenses and mandatory payments on secured debts (like a mortgage or auto loan). If you don’t pay off some debts completely, the judge won’t approve your plan and let you move on.

The following sources of revenue can be used to finance a Chapter 13 plan:

Regular pay or salary money from self-employment commissions from sales or other work earnings from seasonal labor pension payments
Social Security income
Perks for workers’ compensation or disability
Public benefits (welfare payments) such as unemployment compensation, strike benefits, and the like
Alimony or child support You get income from selling property, especially if it’s a component of your main business property, as well as royalties and rents.

It’s not always the case that your married income has to be “yours.” A non-working spouse may file tax returns on their own and deduct their working spouse’s income. A spouse who is jobless may file jointly with a spouse who is employed. Find out more about the repayment plan for Chapter 13 bankruptcy.

Why File for Bankruptcy Under Chapter 13?

Because Chapter 7 bankruptcy does not force the filer to repay creditors, it is the preferred option for many people. However, certain debtors are ineligible. Some, on the other hand, decide that filing under Chapter 13 bankruptcy is a preferable alternative because it offers possibilities not available under Chapter 7.

The following is a list of typical justifications for filing a Chapter 13 case:

A debtor is not qualified to get a Chapter 7 discharge and eliminate qualifying debt if their income surpasses the limit allowed by the Chapter 7 means test.
If a homeowner falls behind on their mortgage payment, they can pay the arrearages over a period of three to five years and still maintain their home (this also applies to past-due auto payments).
If a debtor completes a repayment plan and pays off late support, taxes, or other nondischargeable obligation, they can avoid collection actions like wage garnishments.
Nonexempt property that would otherwise be liquidated in a Chapter 7 bankruptcy can be retained by the debtor; however, the nonexempt component must be paid for over the course of the three- to five-year repayment plan.

Further Chapter 13 Conditions

A substantial income is a prerequisite for Chapter 13 eligibility, but there are additional requirements as well.

You Cannot Have Too Many Debts

If you have more debt than a particular amount, including secured and unsecured, you will not be eligible for Chapter 13 bankruptcy. Begin by familiarizing yourself with the most recent Chapter 13 debt restrictions and methods for meeting them. The U.S. Courts Chapter 13 Bankruptcy Basics webpage allows you to confirm the amounts.

A debt is considered secured if, in the event that you fail to make payments to the creditor, you could lose the particular property you pledged as collateral. The most typical types of secured debts are auto and home loans. However, if a creditor—like the IRS—has placed a lien (notice of claim) against your property, a debt may also be secured in this way.

A creditor does not have the authority to seize specific property in response to an unsecured obligation. Credit card debt, medical and legal costs, past-due utility bills, and department store charges are among the many types of unsecured debts. Read Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority to find out more.

Companies Prohibited from Filing for Chapter 13 Bankruptcy

A company is not permitted to file for Chapter 13 bankruptcy under its own name. Rather, when firms want assistance with debt restructuring, they are directed toward Chapter 11 bankruptcy. There is one exception, though: Even though a sole proprietor cannot file under the name of the company, their personal and corporate debts are included in their bankruptcy case because they are their own. Thus, Chapter 13 can be a useful tool for restructuring a business owned by a single owner.

However, even if you are a business owner, you are still eligible to file for Chapter 13 bankruptcy as an individual. Debts pertaining to your business that you personally own will be included in your Chapter 13 bankruptcy filing. However, the company will still be responsible for the debt. (Again, if you’re a sole owner, the outcome is different—the bankruptcy will handle both your personal and business debt liability.)

How to File for Bankruptcy Under Chapter 13

In the official bankruptcy filing, you will reveal every detail of your financial situation, including your income and expenses, assets, creditors, and past transactions. Once you file your paperwork and any other required materials (such a filing fee and verification that you finished credit counseling), the case will begin. Unless the court grants you an extension, you have fourteen days to file your Chapter 13 repayment plan.

 

If you fulfill all of the requirements of the Chapter 13 plan, filing for Chapter 13 bankruptcy might be a terrific method to get out of debt. Chapter 13 bankruptcy is an option available to those who qualify. It can be used to prevent humiliating collection actions, keep a house from going into foreclosure, and more.

However, not everyone is able to pay Chapter 13 fees, and even those whose income above Chapter 7 levels are not always eligible for Chapter 13. If you’re thinking about submitting a Chapter 13 petition, you should find out:

Below, we outline the steps involved in determining if you qualify for Chapter 13 bankruptcy as well as what to anticipate during the filing process. Find out if filing under Chapter 13 is a better option for first-time bankruptcy filers than Chapter 7.

How Chapter 13 Bankruptcy Is Filed?

In contrast to Chapter 7, Chapter 13 requires you to pay back some or all of your debt to creditors over a period of three to five years. Most people file for Chapter 13 only if they are ineligible for Chapter 7, preferring the faster and much less expensive Chapter 7 procedure.

That isn’t always the case, though. There are important advantages in Chapter 13 that are not present in Chapter 7. These are a handful.

Repay Debt and Maintain a Home or Vehicle

Chapter 7 won’t help if you’re in foreclosure and don’t want to lose your house. Nonetheless, the Chapter 13 payment plan allows you to make up missed payments, allowing you to keep a home, vehicle, or other “secured” asset that would otherwise be returned to the lender.

Save Anything You Would Lose in Chapter 7

The same amount of property can be protected by bankruptcy exemptions for each person filing for bankruptcy. Nevertheless, you are not required to relinquish any assets in order to apply for Chapter 13 bankruptcy.

You retain your exempt property under Chapter 7, and the trustee for Chapter 7 sells any “nonexempt property” that isn’t protected by an exemption. The Chapter 13 trustee, on the other hand, does not deal in real estate.

However, this does not imply that you own more property than a person who files under Chapter 7. Instead, you use your repayment plan to cover the nonexempt property’s worth. See Chapter 13 for further information on what happens to property.

Save Money on Automobiles, Houses, Vacation Rentals, and More

You could be eligible to make a smaller payment in Chapter 13 if the value of your home, automobile, or other property decreased dramatically and you are left with a debt greater than its actual value. Whether the property is a house, car, rental, or some other kind of property will determine whether a “lien strip” or “cramdown” is available.

In Chapter 13, do you pay back everything?

Seldom does a filer’s Chapter 13 plan completely pay off debt. It is among the advantages of Chapter 13. Until you find out more about what’s needed for a Chapter 13 payment, though, you won’t know if you’ll be able to pay off everything you owe.

Continue reading. We’ll walk you through each step.

How to Determine Payments for the Chapter 13 Plan

Because calculating a Chapter 13 plan payment can be a bit tricky, we’ve omitted a few procedures to make things easier. Nevertheless, using this method will provide you with a fairly accurate idea of how much you would have to pay in a standard five-year plan.

Establish the duration of the plan.

Total the amount of debts you have to pay off.
The debt amount is divided by 60 months.
Assess your income to see if it covers the necessary amount in addition to your monthly expenses.
Check to see if you have any “disposable income” left over for obligations that you are not required to pay off in full.
Verify if you pass the “best interest of creditors” standard.
When you’re ready to start your calculations, the stages will be easier for you to follow with the explanations that follow. Make sure you consult with a Chapter 13 attorney to receive a precise payment estimate.

Is a Chapter 13 Payment Plan Duration?

Your income level will determine whether your payment plan is three or five years long. To determine the duration of your plan, follow these steps:

Multiply by two the total gross income that you and your contributing family members generated throughout the previous six months.
On the U.S. Trustee Program website (click “Means Testing Information” to get the state median income charts), compare the figure to the median income for your state.
Your plan must last five years if your amount is more than the median annual income for your household size in your state. If your income is below the median, you can suggest a three-year plan.

How Much of Your Chapter 13 Debt Must You Pay Back?

Plans under Chapter 13 have particular payment guidelines. While some creditors are required to receive 100% of your debt, others are only required to receive a considerably lesser portion or nothing at all. The breakdowns are provided here.

Accounts Payable in Full

All of these payments will be made in full via your plan. To find the monthly payment amount for this category, add the amounts and divide by 60.

Claims made administratively

The trustee’s 10% commission on average, your legal fees, and any professional fees authorized by the court.
payments owed on your house, vehicle, and other past-due secured debts (if you wish to keep the property)

 

Debts That Are Paid 100% to 0%
The remainder of your debts are classified as “general unsecured” debt and are assigned a “pro rata” or percentage of your disposable income. The amount left over after covering your necessary living expenses and the aforementioned debts is your disposable income.

The “best interest of creditors” criterion, which mandates that you pay priority and general unsecured creditors at least as much as you would have under Chapter 7, may, however, require you to make more payments. Stated differently, the same amount as the worth of your nonexempt property, or the assets that a bankruptcy exemption cannot shield.

Priority and General Unsecured Debts:

Unsecured debt, as contrast to secured debt, isn’t backed by property that a creditor may seize if you don’t make your bill payments. Priority unsecured debt has a higher payment priority position in bankruptcy, including recently incurred tax debt and domestic support obligations.

At the bottom of the bankruptcy payment ladder is general unsecured debt. Typical instances consist of:

Significant debts from department stores and credit cards, medical expenses, personal loans (including payday loans), electricity bills, and club memberships.
Except for student loan amounts, the bankruptcy court erases any sums left over at the conclusion of Chapter 13 and you are not required to pay off all general unsecured debts.

What Is Chapter 13’s Typical Monthly Payment?

Although there is no average Chapter 13 payment, you can be sure that it will be much more than you had anticipated when you initially started looking into the possibility of Chapter 13. If you’ve performed an approximate calculation using the previous procedures, you may have arrived at that conclusion already.

Chapter 13 filers utilizing a five-year plan will pay one of two amounts; the majority of filers will fall into the first category, despite the fact that there is no average monthly payment.

Your Monthly Disposable Income

Every cent of your monthly salary will go toward covering your costs and filing for bankruptcy. Your “disposable income,” or the amount left over after mandatory payments and permitted expenses, is owed to your creditors.

It’s a challenging budget to stick to for five years, but when it works, the rewards are great. Not only may filing for Chapter 13 cease creditor harassment, but most filers emerge from the process debt-free, with the exception of student loan and mortgage payments.

All of Your Debts aside from home loans and student loans

Sometimes, people with large disposable incomes pay off all of their debt, including school loans, mortgages, and other long-term commitments, in a move described as a “100% plan.” Because you’ll probably have money left over after paying your monthly bills and Chapter 13 payment, your budget won’t be as strict. How come someone would submit a 100% plan? to protect themselves from collection efforts while gradually repaying the amount.