While many people have a steady income they cannot pay all their bills, despite their best efforts. They find themselves behind on their mortgage and receiving harassing calls from credit card companies. In such cases, filing for bankruptcy protection under Chapter 13 of the Bankruptcy Code may provide a solution to what seems like an insurmountable problem. Once considered a last resort, bankruptcy has evolved into an accepted method of resolving serious financial problems. If you are facing serious financial challenges such as foreclosure, repossession, or garnishment, contact one of Sterling Bankruptcy Center's bankruptcy professionals to determine whether Chapter 13 is right for you.
When is “Reorganization” through Chapter 13 the Right Choice?
Chapter 13 has certain advantages over Chapter 7 in consumer bankruptcies. The biggest advantage for many people is that Chapter 13 allows individuals an opportunity to keep their homes and avoid foreclosure. Chapter 13 also allows individuals to modify some secured debts and extend them over the life of the plan and pay a fraction of unsecured debt with no interest. In addition, Chapter 13 allows the debtor to discharge more types of debts than Chapter 7 does. Under Chapter 13, the debtor is known as a debtor in possession and most debtors are permitted to retain most or all of his/her assets. There are however limitations on how much the debtor can owe. An individual is eligible for Chapter 13 relief as long as the individual's unsecured debts are less than $336,900 and secured debts are less than $1,020,650. These amounts are periodically adjusted to reflect changes in the consumer price index.
An individual cannot file for Chapter 13 protection or for bankruptcy under any other chapter if he/she has filed for bankruptcy and the case was dismissed during the preceding 180 days due to the debtor's failure to appear at the 341 hearing, appear at court, comply with orders of the court, or the case was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which there are liens.
Who can file for Chapter 13 protection?
Any individual, even if you are self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual's unsecured debts are less than $336,900 and secured debts are less than $1,010,650. These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor.
An individual cannot file under chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.
How does Chapter 13 Work?
A Chapter 13 proceeding is initiated by filing a petition with the court. As in Chapter 7 cases, the filing of the petition automatically stays (stops) creditors from trying to collect on most of debts. In addition, in a Chapter 13 case, co-debtors who are not a party to the bankruptcy case may be protected via the automatic stay. A creditor generally may not seek to collect "consumer debts" from with the petition, the debtor must also file schedules reflecting all the debtors assets, liabilities, current income and expenditures, any individual who is liable along with the debtor.
Along a schedule of executory contracts and unexpired leases and a statement of financial affairs. Prior to filing, the debtor must take a credit counseling course and obtain a certificate of completion that must be filed with the court. The debtor must also provide pay advices for the 60 days prior to filing, a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest in federal or state qualified education or tuition accounts. After filing the petition, a trustee is appointed to manage the case. Within 30 to 45 days after the debtor files the petition, the trustee holds a meeting of creditors. The debtor must attend this meeting and answer questions, under oath, regarding financial issues and the terms of the proposed plan.
Along with the petition and schedules, the debtor must file a plan that proposes the details of how he or she intends to pay off creditors in the next three to five years. The plan must provide for fixed payments made directly to the Trustee via an income withholding order or ACH order. If the plan is approved, the trustee will distribute funds to the creditors according to the plan's terms. Within 30 days of filing, the debtor must start making payments under the plan to the trustee, even if the court has not yet approved the plan.
There are three primary types of claims: (1) priority claims, which include most taxes and the costs of the bankruptcy proceedings; (2) secured claims, in which the creditor has the right to recover property (collateral) if the debtor does not pay; and (3) unsecured claims, for which the creditor generally has no special rights to collect against any property the debtor owns. The plan must pay priority claims in full, unless a priority creditor agrees otherwise. Unsecured claims do not need to be paid in full as long as the plan provides that the debtor will pay all "disposable income" over an "applicable commitment period" and as long as unsecured creditors would receive at least as much under the plan as they would if the debtor's assets were being liquidated
The court must hold a confirmation hearing within 45 days of the meeting of creditors, at which time he or she will decide whether the plan is feasible and meets the Bankruptcy Code's standards for confirmation. Creditors may object to the plan. If a creditor or the Trustee objects to the proposed plan, the court will hold a hearing and rule on the objections. If the court approves the plan, however, the creditors can take no action outside the plan's scope to collect their debts.
Once the debtor completes all payments under the plan, the debtor is entitled to a discharge, which releases him or her from all debts provided for or disallowed under the plan. To obtain the discharge, the debtor must also (1) certify that all domestic support obligations have been satisfied (if applicable); (2) complete an approved financial management course; and (3) have not received a discharge within two years in a prior Chapter 13 case or within four years in a prior case under Chapters 7, 11 or 12.
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