Unlike Chapter 7 bankruptcy, which requires people to liquidate (sell) their assets and use that cash to repay their debts, Chapter 13 bankruptcy requires debtors to restructure their debts and create a three to five year repayment plan. Under the repayment plan, the debtor will use his future income to pay off, in full or partially, his creditors. As such, Chapter 13 bankruptcy is applicable only to debtors with regular income. The process of a Chapter 13 repayment plan is supervised by an impartial trustee that is appointed by the court.
Your attorney will work with you to create a repayment plan that is likely to be approved by the court and is manageable based on your income. Repayment must begin within 30 to 45 days of starting your case. Creditors are required to adhere to the repayment plan as approved by the court, and are prohibited from collecting any claims against you.
Your Chapter 13 plan must pay certain debts in full. These debts are called “priority debts,” because they’re considered sufficiently important to jump to the head of the bankruptcy repayment line. Priority debts include child support and alimony, wages you owe to employees, and certain tax obligations.
In addition, your plan must include your regular payments on the mortgage of your primary residence as well as repayment of any arrearages (i.e. the amount by which you’ve fallen behind in your payments). In regards to other secured debts, Chapter 13 allows individuals to reschedule them and extend them over the life of the repayment plan (i.e. either 3 or 5 years).
Lastly, the plan must show that any disposable income you have left after making these required payments will go towards repaying your unsecured debts, such as credit card debt or medical bills. You don’t have to repay these debts in full (or at all, in some cases). You just have to show that you are putting any remaining income towards their repayment.
The length of your repayment plan depends on how much you earn and how much you owe. If your average monthly income over the six months prior to the date you filed for bankruptcy is more than the median income for your state, you’ll have to propose a five-year plan. If your income is lower than the median, you may propose a three-year plan. (To get the median income figures for your state, go to the United States Trustee’s website, www.usdoj.gov/ust, and click “Means Testing Information.”)
No matter how much you earn, your plan will end if you repay all of your debts in full, even if you have not yet reached the three- or five-year mark.
Chapter 13 bankruptcy isn’t for everyone. Because Chapter 13 requires you to use your income to repay some or all of your debt, you’ll have to prove to the court that you can afford to meet your payment obligations. If your income is irregular or too low, the court might not allow you to file for Chapter 13.
If your total debt burden is too high, you are also ineligible. Your secured debts cannot exceed $1,010,650, and your unsecured debts cannot be more than $336,900. A “secured debt” is one that gives a creditor the right to take a specific item of property (such as your house or car) if you don’t pay the debt. An “unsecured debt” (such as a credit card or medical bill) doesn’t give the creditor this right.
It is very important that you feel very confident that you can make the payments under your repayment plan, because at any time that you start falling behind the payments of your repayment plan, your trustee will petition for a dismissal. If that happens you’ll have to show the court that you can get back on track with your plan, or propose an amended plan with payments that are feasible for you and provide a sufficient amount to your creditors. However, if the court believes that you lack the resources to sufficiently pay your creditors the judge will dismiss your case and you’ll owe your creditors the current balance on your debts — that is, what you owed at the start of your bankruptcy case, less the amounts you paid through your repayment plan plus any interest that might have stopped accruing while you were in bankruptcy.
If you do not successfully complete a repayment plan under Chapter 13 you will have a non-discharged or dismissed Chapter 13, which will remain on your credit file for 10 years from the date filed. On the other hand, a successful completion of the repayment plan will result to a discharged chapter 13 bankruptcy, which will remain on your credit file for 7 years from the filing date. Discharge refers to the legal elimination of debt through a bankruptcy case. When a debt is discharged, it is no longer legally enforceable against the debtor, though any lien that secures the debt may survive the bankruptcy case.
Attorney fees for Chapter 13 cases can often be paid as part of future monthly payments set aside for creditors. Any attorney fee is subject to review and confirmation by the Court.
