What Does Chapter 13 Bankruptcy Mean?

Chapter 13 is also called a “wage earner’s plan”. If you have a normal income, Chapter 13 allows you to develop a payment with creditors to pay all or part of your debts. The payment plan will last 3 to 5 years depending on your monthly income.

Unlike Chapter 7 you will not have to liquidate any assets.  In fact, if you are facing foreclosure Chapter 13 will save your home by preventing the foreclosure from going through. Generally, all secured debts you include in the Chapter 13 filing will have their payments extended over the life of the payment plan.

Eligibility to File for a Chapter 13 Bankruptcy

As of 2016, you are eligible for Chapter 13 bankruptcy as long as your unsecured debts are less than $394,725 and secured debts are less than $1,184,200. The debt limits adjust yearly on April 1, therefore the next adjustment date is April 1, 2017. Like Chapter 7, you must go to all court dates as directed unless your lawyer tells you otherwise. If you miss a court date you will destroy your chances of filing bankruptcy at all.

Process of Chapter 13 Bankruptcy

The court assigns an impartial trustee to administer the bankruptcy case in both Chapter 7 and Chapter 13. This trustee evaluates the case, collects payments from you and distributes payments to creditors.

Chapter 13 starts with filing a petition with the courts. The court requires information from both people in a marriage, even if only one person is filing.  This allows the trustee to get an idea of the entire household financial picture.

When you file you will need to provide the bankruptcy trustee with the following:

• Schedule of assets and liabilities (list of all creditors and the amounts and nature of their claims)
• Schedule of current income and expenses (source, amount, and frequency of the debtor’s income)
• A detailed list of the debtor’s monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.
• Schedule of contracts and leases (valid and/or not expired)
• A list of all your property
• Statement of financial affairs
• A copy of the tax returns or transcripts for the most recent and prior years, and any tax returns filed during the case

You must also file a certificate of credit counseling with the following items as a result of counseling:

• A debt repayment plan developed through the credit counseling seasons
• Proof of payment from employers due at least 60 days before filing
• Statement of monthly net income (after tax) and any anticipated increases in income or expenses
• Statements from any student loans

Dealing with Assets and Debts in Chapter 13 Bankruptcy

When you file Chapter 13 an automatic stay is created. As long as you notify the bankruptcy trustee of the creditor that stay will apply to that debt. The bankruptcy trustee notifies all creditors of the stay automatically. The stay does not require any judicial action but rather is part of the bankruptcy operation. The stay prevents creditors from initiating any new or continuing collection efforts. Lawsuits, wage garnishments, and collection attempts by phone and mail are all subject to the stay.

Homestead Exemption and Personal Property Exemptions

One of the reasons people file for Chapter 13 bankruptcy versus Chapter 7 is to protect the equity in real and personal property. Chapter 13 is attractive if you have non-exempt home equity, but cannot afford to pay the trustee the value of the equity. If you file Chapter 13 bankruptcy you can protect the value in your house. Chapter 13 allows you to catch up on debt and pay out the value of non-exempt home equity over time in order to avoid having to sell your home.

Debts in Chapter 13 Bankruptcy

When you file for Chapter 13 bankruptcy, all of your disposable income goes towards paying your debts. Disposable income is the income after you have paid monthly debts and living expenses as declared in the documentation you provide. The courts will use a means test to determine your disposable income. The means test will average 6 months of living expenses and debts to determine what you have left. If your income is below the median income level, you will not have to perform the means test.

If your income is less than the state median the payment plan will last three (3) years. In certain cases, the judge can approve a longer payment plan. If your income is more than the state median, the payment plan will last for five (5) years. While you are on the payment plan a creditor cannot continue trying to collect from you.

Using your disposable income, the bankruptcy trustee pays priority debts first. Depending on how much money you left after expenses and priority debts will determine how much unsecured or non-priority debts get paid.

Non-dischargeable Debts

Like Chapter 7 there are debts that cannot be discharged in a Chapter 13 Bankruptcy. These debts are almost always paid in full through the payment plan.

• Unscheduled debt (those not listed in the bankruptcy petition)
• Child Support*
• Spousal Support*
• Income tax bills*
• Money owed for causing personal injury or death of another person due to drugs or alcohol
• Willful or malicious acts criminal fees and fines*
• Court fees and fines
• 401k loans or retirement plan loans
• HOA’s, condo fees etc.
• Overpayment of government benefits, fees and fines
• Credit card debt* (see dischargeable debts below)
• Student loans*
• Liens on property*
• Debts not dischargeable if a creditor successfully objects

Unscheduled Debts

If you do not list a debt none of the balance is discharged through bankruptcy. The courts will consider this debt as excluded from bankruptcy. If you list a debt and for reasons out of your control the creditor is not notified, the debt is still eligible for discharge. If the debt is non-dischargeable, then it will remain.

Child Support and Spousal Support

100% payment of both child support and spousal support are setup through a Chapter 13 bankruptcy payment plan.

Income Tax Bills 

Most income taxes are priority debts. However, in special cases very old income tax become non-priority debts and have the potential of being discharged. If the income tax filing has fraudulent information, the debt becomes non-dischargeable.

Student Loans

Student loans are rarely discharged through bankruptcy. Generally, the only way to discharge student loans through bankruptcy is to prove they cause an “undue hardship”. This is extremely difficult to prove. Usually “undue hardship” is only granted in cases of severe disability. In almost all cases, you will still be required to pay back your student loans after a bankruptcy discharge. The bankruptcy’s automatic stay will apply to school loans as well.  The stay will give you a chance to work out a payment plan outside of bankruptcy. For help with school loans,  read this article and get guidance on private and federal school loans.

Liens on Property

Liens only receive a discharge if you include the property in the bankruptcy. The first lien on real estate is the mortgage and it is the priority lien. Chapter 13 allows you to eliminate all other junior liens on property if the mortgage is greater than the amount you owe. Any junior liens receive the same treatment as any other unsecured debt. Depending on your disposable income, the lien holders will receive very little or nothing.

Debts from Willful or Malicious Acts

Like Chapter 7, money owed for causing personal injury or death of another person due to drugs or alcohol are not discharged. However, Chapter 13 goes a bit further and includes willful acts such as speeding tickets do not discharge either.

Dischargeable Debts Chapter 13

Chapter 13 bankruptcy discharges more debt than a Chapter 7. Generally, any debt that is not secured gets a discharge.

Credit Card Debt

Credit card debt is unsecured. If you are paying a creditor,  the debt that remains at the end of the payment plan term is usually discharged.  But, it is important to remember credit cards incurred as a result of fraud is non-dischargeable.

As of April 2016 to April 2019, the credit card fraud definition is; 1) any luxury goods (purchases above $675) incurred 90 prior to filing bankruptcy. And, 2) cash advances of $950 or more incurred 70 days prior to filing for bankruptcy. If you expect to get these items discharged the burden of proof will fall on you to prove your actions were not fraudulent.

And more specifically, if you use a credit card to pay debt that is generally considered non-dischargeable (tax liens, student loans), the credit card debt becomes non-dischargeable as well.

Medical Bills

Medical bills are a common reason for people to file bankruptcy. Chapter 13 can wipe out debt medical bill debt.

Personal Loans

Personal loans secured by property can get discharged in a Chapter 13 bankruptcy. However, the creditor reserves the right, in some cases, to repossess the collateral.

Debt a Creditor Successfully Objects

Creditors can object to the Chapter 13 plan if they feel the amount of their payment is insufficient. Two of the common creditors that may object are the mortgagor or car lender. The mortgagor will object to a plan if they feel your payments will not cover your past due payments. The car lender can object for similar reasons or if they feel the estimate of the car’s value is inaccurate.

When a creditor objects the judge will usually request the parties try to resolve the matter. The hearing is postponed while you work to resolve the issue. If the issue does not get resolve the judge will make the final decision.

Chapter 13 Bankruptcy Affects on Co-signers and Creditors

Chapter 7 and Chapter 13 bankruptcy treats co-signers differently. If you have co-signers for any of the debt and you file for Chapter 7, your co-signers are not protected. This means the creditors can still go after them. Chapter 13 protects co-signers under the Chapter 13 co-debtors stay. The stay will prevent any go-signers from collection efforts from creditors. There are some creditors that attempt to lift the stay for co-signers. The reasons are usually;

• The co-signer is the one that actually received the credit
• You are not paying the debt in full through Chapter 13
• The creditor will have damage if the stay continues

Reasons for Denial or Dismissal of Chapter 13

Dismissal of Chapter 13

Keep in constant contact with your lawyer to help get you through the bankruptcy process. Make sure you follow all the required steps and make all necessary court appearances. You lawyer will instruct you if there are court appearances you do or do not need to make. If your bankruptcy gets dismissed due to failure to appear or comply with court orders you are not eligible to file again for 180 days.

Denial of Chapter 13

The court can deny a Chapter 13 discharge for the same reasons a Chapter 7 bankruptcy gets discharged:

• If you do not provide tax documents as requested by the courts
• You don’t complete a personal financial management course
• If you transfer or hide property in order in an attempt to defraud or hinder your creditors
• Attempting/actually destroying or hiding books or records
• Committing perjury or other fraudulent acts in connection with your bankruptcy case
• Hiding/not accounting for lost assets
• Violating a court order
• Having previously filed a bankruptcy case and have a Chapter 7 discharge within the last 8 years or Chapter 13 discharge within the last 6 years.

Chapter 13 Discharge

Hardship Discharge

After the plan has been determine you must follow it. If you experience some hardship that prevents you from complying with the payment plan you can request to have debts discharge.  These hardships include:

• You cannot make the payments due to circumstances beyond your control
• Creditors have received at least the mount they would have received in a Chapter 7
• Modification is not possible

Normal Discharge

A Chapter 13 discharge occurs when you complete all payments per the payment plan. Chapter 13 payment plans usually last 3 to 5 years. Therefore, the discharge takes place in approximately 3 – 5 years from the start of the plan. Creditors normally look more favorably on Chapter 13 bankruptcy vs. a Chapter 7. This makes the time frame for major financial purchases, like buying a home, shorter than with a Chapter 7. Chapter 13 bankruptcy shows for seven (7) years after the discharge date. The seven (7) year reporting date is an improvement over the ten (10) reporting date of Chapter 7.