06 Sep How does Chapter 13 bankruptcy work?
By Atty. Crispin Caday Lozano
Chapter 13 Bankruptcy is a reorganization of your debt while paying back your outstanding debt to creditors. Chapter 13 is Bankruptcy intended for an individual or family with a regular income. The first and main requirement to file for Chapter 13 bankruptcy is that any individual who files must have a source of income to repay. Even if you are self-employed or operate an unincorporated business you may qualify. Chapter 13 allows you to keep all of your properties, and to set up an affordable payment plan with the Bankruptcy Trustee. The payment plan is typically 3-5 years. At the end of the payment plan, most unsecured debts are considered paid in full.
Chapter 13 Limitations
There are debt limits for Chapter 13 bankruptcy. There must also be no Chapter 13 bankruptcies in the last 2 years or no Chapter 7 bankruptcies in the last 4 years. There cannot be any Chapter 13 bankruptcies that have been dismissed by the court within the previous 180 days either.
How Does Chapter 13 Bankruptcy Work?
In Chapter 13, the amount of repayment plan is based on your income and paid back in either a 3 or 5 year plan. To determine the period of repayment, your income shall be compared to the state median income. If your income is lower than the median, your payment plan period is 3 years, and if your income is higher than the median, it will be a 5 year plan.
In Chapter 13, you are required to file a repayment plan that lists your current creditors and how much you intend to repay them. All secured debts and the delinquent amount must be specified. Debts that are considered high priority such as federal taxes, child support or alimony must be paid back in full. The amount of money left over will then go to unsecured debts. Within 180 days a confirmation hearing is held. This hearing determines whether the court approves your proposed repayment plan. If the court agrees with the plan, then it will become a legal obligation through an order of the court. After completing the repayment plan any debt left over will be discharged by the court.
In addition to the general requirements listed above, the repayment plan must pass three tests:
- It must be delivered in good faith.
- Unsecured creditors must be paid at least as much as if a Chapter 7 bankruptcy had been filed. Generally, this is the value of all the non-exempt property you own (please refer to California bankruptcy exemptions).
- All disposable income must be paid into the plan for 3-5 years.
- Bankruptcy will actually improve your credit within one year because your unsecured debts are discharged. Although the bankruptcy will be in your records for 10 years, not filing bankruptcy will make your credit even worse until most your debts are paid.
- If you are being sued by your creditors, most money judgment can be eliminated in bankruptcy.
- Collection actions continue and you can be sued if you are in debt settlement.
- Chapter 7 will eliminate all unsecured debts. If you are near retirement age, you must eliminate most of your debts.
- Bankruptcy will stop foreclosure actions. If your trustee sale date is 10 days before, you can still file for bankruptcy.
- If your salary is being garnished, you have a court case about debts or you are being harassed by creditors, bankruptcy can stop garnishment, court cases, harassing creditors and eliminate the debt.
- Bankruptcy is cheaper, faster and safer than debt settlement which has no guaranteed success.
- Preserve your health, eliminate stress and live a happy life by eliminating your debts which is the root of all problems.