When individuals cannot afford to pay their bills, they may consider bankruptcy as an option. There are two chapters of bankruptcy that individuals can file, Chapter 7 and Chapter 13. Individuals who have little income and no assets can file a Chapter 7 bankruptcy to eliminate their debt. To file for Chapter 7 bankruptcy, individuals must qualify under a Means Test. The Chapter 7 Means Test takes an individual’s household income and compares it to the average household median income in the State they reside in. If there is money left over to pay creditors the Bankruptcy Court expects individuals to pay some of their debts back. Individuals who do not qualify under the Means Test for a Chapter 7 bankruptcy, must file a Chapter 13 bankruptcy to remove their debts. A Chapter 13 bankruptcy is for high wage earners who may or may not have assets. In a Chapter 13 bankruptcy, individuals enter a 3-5-year repayment plan and pay back some or all their debts. Below is an overview of the Chapter 13 bankruptcy process.
Who is Eligible for Chapter 13?
Unfortunately, not every individual is eligible for a Chapter 13 bankruptcy. Individuals looking to file a Chapter 13 bankruptcy should consider whether they can file for bankruptcy relief under Chapter 13. A filer who qualifies for a Chapter 13 bankruptcy can wipe out some or all their debts.
Debt Limit: Individuals looking to file Chapter 13 bankruptcy must be under the debt limit that the Bankruptcy Court sets. An individual's secured and unsecured debt must not exceed certain amounts. The current debt limits are as follows:
● Individuals must have less than $1,257,850 of secured debt.
● Individuals must have less than $419,275 of unsecured debt.
Individuals who do not meet these criteria must consider filing a Chapter 11 bankruptcy instead. Secured debt is debt that is attached to collateral. Examples of secured debt are mortgage loans and vehicle loans. Unsecured debt is debt that is not attached to any property. Examples of unsecured debt are credit cards, medical bills, and personal loans.
Monthly Income: Individuals considering filing Chapter 13 bankruptcy must show the Court they can afford to pay back some or all their debts in a monthly repayment plan. To be able to do this, individuals must have a steady income. In some cases, where individuals are behind on their mortgages, they will need to show the Court that they can pay their mortgage arrears and their current monthly mortgage payments simultaneously. If an individual’s monthly income is too low to pay back some of their debts and their living expenses, the Court will deny their Chapter 13 plan and the case will be dismissed.
Businesses: Chapter 13 bankruptcy is only a debt relief option for consumers. Thus, individuals (non-business) can only file under Chapter 13 bankruptcy. Keep in mind, however, individuals who personally guaranteed their business debts can use the Chapter 13 bankruptcy process to relieve them of their obligations.
The Chapter 13 Bankruptcy Fees
Every individual who files Chapter 13 bankruptcy, must complete two credit counseling courses and pay the required Chapter 13 filing fees. The filing fees for a Chapter 13 bankruptcy are $310. This fee is due as soon as the bankruptcy petition is filed. Unlike individuals who may be able to request fee waivers and pay the fee in installments, the Bankruptcy Court assumes that individuals filing Chapter 13 have enough income to pay the filing fee. Thus, individuals should have the filing fee with them when they file their petition. Failure to pay the filing fee can be grounds for having the case dismissed.
Credit Counseling Courses: Every individual who files Chapter 13 bankruptcy must complete two counseling courses. The first credit counseling course must be completed before the individual files their bankruptcy petition. The first credit counseling course ensures that individuals have considered other debt-relief options before filing bankruptcy. The second course must be completed after the bankruptcy case is filed. The second bankruptcy course is also known as the “Debtor Education Course.” This course gives individuals tips and tools to help rebuild their credit after the bankruptcy is over so they don’t fall back into the same financial circumstances in the future. Once both courses are completed the individual will get a certificate of completion that must be filed with the Court. Both courses typically cost anywhere between $10-$30.
The Chapter 13 Bankruptcy Petition
The bankruptcy petition is the most important document which lists an individual's debts, assets, and personal information. Along with the bankruptcy petition, individuals filing Chapter 13 bankruptcy must also propose a repayment plan. The repayment plan must show the Bankruptcy Court that the filer can repay their debts over a 3-5-year time-frame. Creditors and the Bankruptcy Trustee can object to the plan if they do not find it feasible. Each State uses either a local form or its own plan that individuals can find on their Court’s website.
Individuals should know that the first plan payment is due within 30 days of the filing of the bankruptcy petition whether the plan is approved or not. Thus, individuals should start making their plan payments immediately.
The 341 Meeting of Creditors
After an individual’s bankruptcy petition is filed with the Court there will be a Trustee assigned to the case. A trustee is an attorney that represents an individual’s creditors. All individuals must attend a 341 Meeting of Creditors where they will be asked questions by the Trustee assigned to the case. The trustee will review the individual's bankruptcy petition and plan. At the 341 Meeting the Trustee and creditors have a chance to object to the plan.
If the plan is not feasible the Chapter 13 bankruptcy process may take longer. In most cases individuals are given a chance to amend their plan. If the bankruptcy trustee closes the meeting the individual is one step closer to getting their bankruptcy discharge.
The second mandatory hearing that individuals must attend is a confirmation hearing. At the hearing, the Judge will either “confirm” the individuals proposed repayment plan or deny it. The judge will confirm the plan if the plan meets the following criteria:
● The repayment plan is feasible - The individual can afford to pay the monthly payments and meet his/her monthly living necessities.
● The plan was made in good faith - The individual is showing that he can pay some debts and not others based on the available disposable income and is not trying to manipulate the Court.
● The repayment plan complies with the law – That is, priority creditors are being paid first, debt limits are met, etc. Priority creditors must be paid in full. These include child support, alimony, arrearages, and tax obligations.
After the Chapter 13 confirmation hearing the filer will continue making payments for 3-5 years. Once their repayment plan is over, they will get any outstanding debt wiped out.
Falling Behind on Chapter 13 Plan Payments
Individuals who enter a Chapter 13 bankruptcy repayment plan are in the plan for a long time. A lot can happen in 3-5 years. Individuals who face some type of financial hardship and are unable to make their plan payments must act before it is too late. In some cases, individuals can amend their plan and can reduce the amount they pay each month. If this still is not feasible, they may be able to convert their case to a Chapter 7 bankruptcy. Individuals who have property should speak with an attorney before doing this.
Chapter 13 Discharge
Individuals will get a bankruptcy discharge once they have completed their Chapter 13 bankruptcy repayment plan. The court will issue a discharge if the individual is current on child support and alimony payments and has paid back all their secured creditors. A bankruptcy discharge is an order issued by the Court stating that the individual is no longer liable for their outstanding debts.