This is a query I am frequently asked, and while I am happy to answer it, it requires a review of Bankruptcy 101.
Let's begin with chapter 7 of the Bankruptcy book....
A person must first determine their eligibility before filing. A person is eligible for Chapter 7 relief if either: (1) their income does not exceed the state's median income level; or (2) if their income exceeds the state median, they pass the """"means test"""". In addition to meeting the income requirement, a person must receive credit counseling from a United States Trustee-approved agency before filing for bankruptcy.
The first step in determining whether you qualify for Chapter 7 relief is preparing the petition. Preparing a bankruptcy petition can be overwhelming and perplexing, which is why we recommend that you seek assistance from an experienced bankruptcy attorney. A number of specific rules and procedures must be followed to ensure that your petition is filed correctly with the court and that you receive the maximum number of exemptions permitted.
Once a petition has been filed properly, the court will appoint a trustee who will be assigned to your case to collect all """"non-exempt property,"""" after which he or she will distribute the proceeds to the appropriate creditors. This does not imply that a trustee will seize your entire estate. In fact, a chapter 7 debtor may be eligible to reaffirm certain debts, which would then be exempt from seizure and repayment by the trustee. By signing a reaffirmation agreement, a debtor can continue to make payments on a car loan or a mortgage, for instance.
Under Chapter 7, the debtor does not pay the trustee for his or her services, and a debtor who files for bankruptcy receives a discharge of all dischargeable debts.
Therefore, what is a chapter 13 bankruptcy?
In contrast to Chapter 7 bankruptcy, Chapter 13 bankruptcy is sometimes referred to as a reorganization bankruptcy. In Chapter 7 bankruptcy, the majority of debts are discharged and the debtor is given a """"fresh start"""" However, those who do not qualify for Chapter 7 bankruptcy or who wish to retain valuable assets may still seek financial relief by registering for Chapter 13 bankruptcy. In Chapter 13 bankruptcy, a debtor does not surrender any assets, but instead must use their income to repay some or all of their debts to creditors, typically over a three- to five-year period.
The length of a person's repayment obligation will hinge on the proportion of their income to their debt. If a person's average monthly income during the six months preceding the filing of a Chapter 13 bankruptcy petition is greater than the state's median income, they will be required to prepare and propose a five-year repayment plan. However, if a person's income is below the median, they may propose a three-year repayment plan.
Even if you have not yet reached the three- or five-year mark, your plan will terminate if you repay all of your debts in full, regardless of how much you earn.
Chapter 13 bankruptcy is not ideal for all debtors. Due to the fact that Chapter 13 requires you to use your income to repay some or all of your debt, you will be required to demonstrate to the court that you can meet your payment obligations. If your income is irregular or too low, the court may deny your Chapter 13 petition.
If your total debt burden is excessive, you are ineligible as well. Your secured debts cannot surpass $1,010,650, and unsecured debts cannot exceed $336,900. A """"secured debt"""" is a debt that grants the creditor the right to seize a specific item of property (such as your home or car) if the debt is not paid. A """"unsecured debt"""" (such as a credit card debt) does not grant this right to the creditor.
Similar to Chapter 7, prior to filing for Chapter 13 bankruptcy, a person must receive credit counseling from a United States Trustee-approved agency.
The repayment plan is the most essential and unfortunately the most complicated aspect of a Chapter 13 filing. This is a comprehensive inventory that describes precisely how each debt will be repaid. As there is no official form for the plan, it is strongly advised that you consult with an experienced bankruptcy attorney when compiling your repayment plan documents.
Certain debts must be paid in full using a Chapter 13 plan. These debts are referred to as ""priority debts"" because they are deemed significant enough to advance to the front of the bankruptcy repayment line. Child support, alimony, wages owed to employees, and certain tax obligations are examples of priority debts.
In addition, your plan must include regular payments on secured debts, such as a mortgage or an auto loan, and repayment of any arrears (overdue amounts) on the debts.
A repayment plan must also indicate that any remaining disposable income after required payments will be applied to repaying unsecured debts, such as credit cards. In some instances, individuals will not be required to repay these debts in full or at all.
If a Chapter 13 repayment plan cannot be completed due to extenuating circumstances, the bankruptcy trustee has the authority to modify the plan, or a court may discharge the residual debts in full if """"hardship"""" is demonstrated. If the bankruptcy court will not allow you to modify your plan or grant you a hardship discharge, you may be able to switch to a Chapter 7 bankruptcy or seek court permission to dismiss your Chapter 13 bankruptcy, in which case you would still owe any remaining debts, plus interest, to creditors discharged while the Chapter 13 case was pending.
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