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What is Chapter 13 Bankruptcy?

Are you employed? Do you own property and want to avoid foreclosure? Chapter 13 bankruptcy is designed to allow you to maintain possession of your property. Chapter 13 is also referred to as ‘the wage earners plan,’ because it allows individuals with a steady income to have the courts intervene between the individual and their creditors to set up a repayment plan spanning over the next three to five years. While under the protection of Chapter 13 bankruptcy, the law forbids creditors from contacting the individual directly. The individual makes a monthly payment to a Chapter 13 trustee, who distributes the payment to creditors. As long as the individual keeps up with their monthly payments, they can avoid any foreclosures or repossessions of their property. By filing under Chapter 13, individuals can halt foreclosure proceedings, and be given the opportunity to catch up on delinquent mortgage payments.

Individuals under the protection of Chapter 13 can:

  • Reschedule and extend secured debts over the duration of Chapter 13 plan
  • Lower monthly payments on secured debts
  • Avoid property foreclosures and repossessions
  • Protect co-signers who are associated with the individuals debt
  • Get current with missed mortgage payments

Who can file for Chapter 13 Bankruptcy?

Chapter 13 bankruptcy can be filed by any individual, even if self-employed, providing the individual’s unsecured debts are less than $419,275 and secured debts are less than $1,257,850. Please note, these amounts are approximate because they adjust periodically to reflect the consumer price index. In general, if the individual’s current monthly income is below the state median, the plan will be for three years. If the current income is above the state median, the plan will be for five years. No plans are extended beyond five years.

If the individual is married, they can file for a joint Chapter 13 Bankruptcy. If the individual is married, and wishes to file Chapter 13 independently, the courts will still require all income information for the spouse be submitted to accurately determine the financial situation of the household.

 

What is Required to File Chapter 13 Bankruptcy?

In order to qualify for Chapter 13, or any bankruptcy chapter, the individual must seek credit counseling within 180 days of filing. The credit counseling must be done by and approved agency, and can be completed in either an individual or group setting.

In addition to the official filing documents, the courts also require:

  • List of assets and liabilities
  • List of current income and expenditures
  • List of executory contracts and unexpired leases
  • A statement of financial affairs
  • A certificate showing the completion of credit counseling and a copy of any repayment plans developed through the counseling program
  • A record of any interest the debtor may have in federal or state qualified education/ tuition accounts

Once the protection of Chapter 13 is granted, the individual will need to provide their assigned Chapter 13 trustee with tax returns from the most recent tax year, and any tax returned filed during the duration of the case.

During the three to five years, providing that the individual makes their scheduled payments, and does not incur any additional debt, the plan entitled the individual to retain ownership of their property. To increase the likelihood of payments being made on time, it is an option make payments through payroll deductions. If the individual fails to keep up with the payments, the courts can choose to either dismiss the case, or convert it to a liquidation plan under Chapter 7 bankruptcy.

How Chapter 7 Bankruptcy Works

A Chapter 7 Bankruptcy case begins with filing a petition with the court serving the area where the individual resides, or in the area where the individual has set up their principal assets.

  • In addition to the petition, the individual must also submit:
  • List of assets and liabilities
  • List of current income and expenditures
  • List of executory contracts and unexpired leases
  • A statement of financial affairs

Once the petition is accepted, the individual will be assigned a case trustee who will require a copy of the most recently filed tax returns, including prior years that were filed after the case began.

  • If the individual has primarily consumer debts, there are additional fining requirements:
  • A certificate of credit counseling and a copy of any debt repayment plan developed during credit counseling, acquired within 180 days of filing for Chapter 7
  • Evidence of all payment from employers, if any, received within 60 days prior to filing
  • A statement of monthly net income and any anticipated increase in income or expense to occur after filing
  • A statement of any interest the individual may have in federal or state-funded education or tuition opportunities

If married, it is possible to file jointly, but if a married individual chooses to file alone, courts still require all documentation from both husband and wife to make a final determination. In order to complete the official bankruptcy forms, the individual (and spouse, if married) must provide the following information:

  • A list of all creditors, and the amount of their claims
  • The source, amount, and frequency of the individual’s income
  • A list of all the individual’s owned property
  • A detailed list of the individual’s monthly living expenses including food, clothing, shelter, utilities, taxes, transportation, child care, prescriptions, etc.

Successful filing of a Chapter 7 Bankruptcy automatically stops most collection attempts against the individual and their property. As long at the filing is active, creditors will typically cease to initiate or pursue lawsuits, wage garnishments, and even demanding phone calls. A bankruptcy clerk contacts all creditors the individual has provided, and informs them of the Chapter 7 filing.

Within 40 days of filing a petition for Chapter 7 Bankruptcy, a meeting of creditors is assigned with a US bankruptcy trustee. The individual must attend the meeting and answer several questions under oath to determine the legitimacy of the claim. Within ten days, the US trustee reports to the courts about whether the case should be presumed legitimate.

 

The primary role of the Trustee, is to verify the accuracy of the information provided in the filer’s bankruptcy petition and schedules and to liquidate non-exempt assets (if any) for distribution to creditors. If all the individual’s assets are exempt, the trustee will file a “no asset” report to the court, and no distribution will be made. The large majority of Chapter 7 cases result in a finding of no assets to distribute creditors and the bankruptcy filer is allowed to keep their possessions, including their home and vehicles

Almost 99% of Chapter 7 Bankruptcy cases qualify to be discharged within the 60 to 90 days of the petition being filed. The only grounds for which a discharge is denied are:

  • If a creditor issues a formal complaint, prolonging the process
  • The courts find that the individual failed to provide accurate records of income and expenses
  • The courts find the individual failed to give an accurate account for their loss of assets
  • Individual committed a bankruptcy crime such as perjury, failed to obey a court order, fraudulently transferred, concealed, or destroyed property to prevent liquidation, or failed to complete an approved credit counseling course

 

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