Chapter 13 for Individuals
Chapter 13: the reorganization bankruptcy or wage earner’s plan
To file for bankruptcy under this chapter, the debtor might be an individual, sole proprietorship, or unincorporated business entity if the debts are below the limits set by Title 11 of the United States Code. Secured debts must be less than $1,010,650 and unsecured debts must be below $336,900, otherwise filed under Chapter 11.
A personal Chapter 13 is available to filers with regular income who develop a plan to repay some or all of their debt. These filers will have many valuable assets they want to keep including a home or car, and the debts are restructured into a payment plan over 3-5 years. At the conclusion of the repayment plan, the remaining balance is discharged and the debtor has no further obligation to pay. The advantage of Chapter 13, as opposed to a straight liquidation, is to stop foreclosure proceedings on your home or to reduce your monthly payments on your debts by consolidating into one monthly payment. Additionally, the debtor only pays back a percentage of the debts. Other advantages might include lowered interest rates, crammed down auto loan (the total amount owed is lowered to the actual value), and the second mortgage stripped off the house.
The Chapter 13 Process:
The Chapter 13 bankruptcy commences by filing a petition with the local bankruptcy court. Upon filing an “automatic stay” goes into effect, which means the creditors are prohibited from making any attempt to collect their debt including contact by phone, attempting foreclosure, repossession, garnishment of wages, or initiating or continuing lawsuits.
Along with the petition, the debtor must file various documents to the Trustee in order to provide the necessary information to adequately review the debtor’s financial situation. These schedules and statements include a list of outstanding debts, current income and expenses, a list of executory contracts and unexpired leases, any current or potential lawsuits, any recent asset transfers, anticipated increases in income or expenses after filing, and documentation of any federal or state qualified education or tuition accounts. The debtor must also provide evidence of payment from employers, like pay stubs, or social security benefits received within 60 days of filing. The debtor must also provide a copy of the current year’s tax return or transcripts along with tax returns filed during the case even if they are for prior years.
Prior to filing, the debtor must complete a credit counseling course within 180 days of filing the petition and provide a completion certificate to the court along with a copy of any debt repayment plan developed through credit counseling for approval by the Trustee. This plan will include a proposed repayment schedule. It might also include requests to terminate burdensome leases and contracts or to recover assets. Failure to submit any of these requirements may result in the case being dismissed.
Once the Court receives the bankruptcy petition, a Bankruptcy Trustee is appointed to administer the case and a date is set for the creditor’s meeting between 20 and 50 days after the petition is filed. This meeting is also called a 341 Hearing where the debtor must appear before the Trustee and creditors who will ask questions of the debtor. The Trustee’s role is to evaluate the case by determining the debtor’s ability to pay under the repayment plan and to collect and then disburse the payments to the creditors. Creditors may then file their claims with the court within 90 days after the first date set for the meeting of creditors. Another appearance is required after the 342 Hearing, called the Confirmation Hearing, to evaluate the Chapter 13 repayment plan. Lastly, the debtor must submit a certificate of completion from a debtor education course prior to the last payment in the plan.
Upon the successful completion of the 3-5 year repayment plan, the Bankruptcy Court discharges the remaining debt and closes the bankruptcy proceeding.
For additional information on filing for bankruptcy, see our section on Bankruptcy Frequently Asked Questions.
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