Overview

If you’ve been buried under a mountain of debt, you may have pondered the idea of filing for bankruptcy. Bankruptcy is defined as court procedure to declare that your current outstanding debts are unpayable.

Chapter 13 bankruptcy allows consumers to restructure their outstanding debts through federal protections. Under Chapter 13, you and the bankruptcy court will also create a payment plan that could last from 3 to 5 years.

We will go over the qualifications necessary to file for Chapter 13 bankruptcy, the steps needed, who should file, and more.


Qualifications for Chapter 13 Bankruptcy

To file for Chapter 13 bankruptcy:

  • You must have a “consistent” income
  • Your total unsecured debts cannot exceed $394,725 and your secured debts cannot exceed $1,184,200
    Side note: To learn about the differences between secured and unsecured debt, click HERE
  • You must have no other Chapter 13 filings in the last two years or Chapter 7 filings in the last four years

You are not eligible for Chapter 13 bankruptcy if:

  • Your income is too low
  • Your income is not consistent
  • If your total secured debts are over $1,149,525
  • If your total unsecured debts are over $383,175

Filing for Chapter 13 Bankruptcy

If you’ve been considering filing for bankruptcy, take the time to meet with a counselor from a non-profit credit counseling agency or a bankruptcy attorney. An attorney should not charge you for an initial consultation.

When you take the time to speak to industry professionals about Chapter 13, you can find out if bankruptcy is the best option for you, or if there are better alternatives out there.

If you decide to move forward with your Chapter 13 filing, you and your attorney will need to prove that you are eligible for a Chapter 13 reorganization. You and your attorney will work with your court-appointed bankruptcy trustee.

A bankruptcy trustee is a person that is court-appointed to oversee and administer your bankruptcy case. We will detail all of this further in this guide

A trustee is paid for by the bankruptcy court. Their fee is typically included in the filing fees for Chapter 13 bankruptcy cases. Under current bankruptcy laws, a trustee can charge up to 10% of the total payment plan.

The fees collected by the trustee must be used to cover the costs of filing for bankruptcy and for running the trustee’s office.


Step 1: The Pre-Filing Steps

If you have decided filing for Chapter 13 bankruptcy is your best bet, here are some steps you will need to take:

Credit Counseling Course

Often times, you will be asked by the court to take a credit counseling course with a non-profit agency.

The goal of this course is to help educate you and to A man look at information on Chapter 13 bankruptcy on his phoneprovide you with alternatives to bankruptcy.

Credit counseling courses can also provide you with a wide array of tools and resources you can use to pay off your debt.

If you do not complete this course, the court may dismiss your case.

If you and your spouse are filing a joint bankruptcy petition, you will both need to enroll in the credit counseling course. Remember, these credit counseling courses are designed to help you get your finances on track to repay your debts.

Work with an Attorney

Your attorney will be at your side throughout the entire bankruptcy process. Be sure that the attorney you decide to work with is qualified and well versed in bankruptcy law and procedures.

Having an error in your filing could lead to your bankruptcy case being discharged. Bankruptcy is a complex process and should be filed for with the assistance of a professional.

If you’ve never worked with an attorney before, there are a few ways you can find a qualified bankruptcy lawyer. The American Bar Associations website offers a directory of all lawyers and firms that meet federal standards.

Another resource is NACBA, which is short for the National Association of Consumer Bankruptcy Attorneys. This is a directory of all attorneys and firms that specialize in consumer bankruptcies.

If you already have an attorney, it’s still good practice to work with one specializing in bankruptcy. If you find a lawyer you’re interested in, be sure to ask them about their background and any past cases.

If an attorney has a bankruptcy certification from the American Board of Certifications, its a good bet they know their way around bankruptcies complex laws. A good bankruptcy attorney will also help to ensure that bankruptcy is the right choice.

You should note that attorneys will charge different rates for a reason: some are better than others. If your a consumer that rents, has limited assets, and owns a $1,000 car, you won’t have too much to worry about by working with a discount attorney.

However, if you own a home and other investment properties along with multiple cars, you are going to need a more expensive and experienced legal representative. One small mistake on your bankruptcy papers could lead to the debt not being erased and even more headaches.

When speaking with an attorney, ask them about the type of clients they represent and the history of their work. A good bankruptcy attorney will have no problem talking through a consultation and will not “need to check” on answers to your questions, they will know the answers right away.

An attorneys fees should also include all necessary document fees and costs associated with filing for Chapter 13 bankruptcy.

Filing for bankruptcy can be done without an attorney, but bankruptcy laws are very technical and you are required to sign documents and petitions correctly. If you fail to complete the necessary forms correctly without a lawyers assistance, you may face dismissal of your case.

Complete the Paperwork

Once you’ve found an attorney to work with, you will need to sit down and complete the various forms needed to file for Chapter 13 bankruptcy. You will be required to provide documents that can show the court your financial standing. This can include providing proof of debts, income, and monthly living expenses.


Step 2 - Filing for Chapter 13 Bankruptcy

File a Bankruptcy Petition

This is the stage where you and your attorney will start to bring the bankruptcy to court. In this stage, you will also receive a court-appointed bankruptcy trustee.

Once you’ve submitted the proper paperwork, you will enter an “Automatic Stay” stage. This means that you cannot legally be contacted by any debt collector or collection agency about your past debts.

Your creditors will receive a notification that you have begun the filing process. If a creditor contacts you about a debt after filing, be sure to take down their name and file a report with the FTC.

An “Automatic Stay” also temporarily stops the foreclosure process, allowing you the chance to keep your home.

The Chapter 13 Payment Plan

After 14 days of filing the petition, your bankruptcy court will require that you submitted a proposed repayment plan.

You are obligated to start making payments on the repayment plan within the first 30 days of filing the petition, regardless of if your case has been approved or not.

A chapter 13 repayment plan is not too hard to understand. Essentially, you are allowed to repay your old debts over a period of 3 to 5 years.

You can use this time to catch up with past due mortgage payments, taxes, and child support.

In a Chapter 13 repayment plan, there are certain claims referred to as “priority claims”. A priority claim must be paid before any non-priority if there are funds available.

Some examples of priority claims include the cost of the bankruptcy, child support and alimony, taxes owed, and any injury or death claims related to intoxicated motor vehicle accidents.

Be sure to disclose all of your current obligations and/or expenses to your attorney to ensure you receive all the benefits Chapter 13 bankruptcy has to offer.

As an example, let’s say your mortgage payment is $1,000 per month, and you’re 6 months behind. This would mean that you are $6,000 behind on your payments.

Take the $6,000 and divide it by the number of months in your repayment term, here we will use 5 years or 60 months.

When we divide the amount past due by the number of months we have to repay, we get a total of $100 per month ($6,000 divided by 60 months).

The $100 per month is how much you will pay for the next 5 years to catch up on your past due mortgage payments of $6,000.

You can use this calculation to find out how much you will need to repay as a part of your repayment plan.


Step 3: Post Bankruptcy Filing

Meeting of Creditors

When you are between 21 and 50 days after filing, your Chapter 13 bankruptcy trustee will organize a meeting between you, your creditors, and also themselves.

The Chapter 13 trustee will issue a “Notice of Chapter 13 Bankruptcy Case, Meeting of Creditors & Deadlines” too all the creditors listed on your bankruptcy documents. This document will include:

  • Your name and living address
  • The date, time, and location of the first Meeting of Creditors”
  • Instructions and details for creditors to file a proof of claim to a certain debt
  • A deadline date to file an objection

A Meeting of Creditors is also referred to as a “341 Meeting”. This meeting will take place in a federal building but is not done in a courtroom or in front of a judge. Be sure to bring both your social security card and a form of photo identification.

In the Meeting of Creditors, you will sit down with your attorney and answer questions the trustee asks of you. Your trustee will ask you about your employment, the value of your property, your dependents, and more. Once the trustee is done, your creditors can begin to ask you questions.

Your creditors will want to know how you plan to work with them on your repayment plan. In most cases, a creditor will not attend a “Meeting of Creditors”, instead choosing to object to your repayment plan via mail until they and your attorney can reach a deal in terms of repayment.

Your creditors have the legal right to object your bankruptcy and also file a complaint to object any discharge of a certain debt.

Confirmation Hearing

After your Meeting of Creditors, you, your trustee, and possibly your creditors will attend a confirmation meeting to confirm the payment plan you and your attorney developed.

Courts hold a confirmation hearing to ensure that your payment plan meets all requirements. In a confirmation hearing, any party has the right to object to your payment plan, including the trustee.

A trustee may object your payment plan if they feel that your creditors are not getting adequate repayment or if your payments are too high to afford. Creditors can also object at any stage in the bankruptcy process.

If your bankruptcy is confirmed, your trustee will begin dispersing the designated portions of your Chapter 13 payment plan to your creditors. You are required to begin making payments as soon as this meeting ends.

Education Course

Before your Chapter 13 bankruptcy case is approved and completed, you are obligated to complete an “education course” for debtors. These courses are typically provided by a non-profit credit counseling agency.

The overall goal of this course is to help educate you on making smart financial decisions in the future so you will not need to file for bankruptcy again in the future.

Most educational courses will cover topics such as budgeting, effective use of credit, and ways to deal with a financial emergency.

However, there are certain circumstances that allow you to avoid attending an education course for debtors. If you are a person with a disability and find it hard to attend the course, the court may not require that you complete the course.

Active military personnel and Americans in extremely rural areas are often not required to attend. If you do not attend your educational course, your bankruptcy case could be thrown out.

Post Filing

Your first payment plan is due within 30 days of the date that your Chapter 13A man begins to take notes on Chapter 13 Bankruptcy bankruptcy petition was filed with the court.

You can make your chapter 13 payments by personal check, money, order, or a cashiers check.

It is important that you leave your full name on each and every single payment so that the trustee knows who you are. Be sure to include your case number on any check as well.

You cannot mail cash to the trustee’s office for payments. Ensure that if you send a check, you have enough money in your account to pay for it.

A single missed payment can lead to disaster for your case, leaving you to lose all the benefits of Chapter 13 bankruptcy and being booted out of the program.

If you expect to miss a payment due to lack of funds, call your attorney right away. It is more common than you think to not have the funds to make Chapter 13 payments.

You will also be required to keep a current mailing address with the bankruptcy court and the bankruptcy trustee. If you have moved, call your attorney and update your address.

Be sure that your attorney confirms the address change with the bankruptcy court as well. Your bankruptcy trustee will not change your address if it has not been changed with the court first.


Pros and Cons of Chapter 13 Bankruptcy

Pros of Chapter 13 Bankruptcy

  • You are given up to 5 years to repay missed mortgage payments. This can allow you to save your home from bankruptcy
  • You will not be forced in any way to sell or liquidate any assets under Chapter 13 bankruptcy
  • You can lower some monthly payments on some debts
  • None of your cosigners will be held liable for your debts
  • You can declare bankruptcy again as soon as you file

Cons of Chapter 13 Bankruptcy

  • Repayment plans can be hard to make. Almost all available and disposable income will go towards paying your creditors. You can expect to make these payments for 3 to 5 years.
  • Chapter 13 has a larger expense attached to it. Your attorney will need to complete more paperwork on your behalf.
  • There is a maximum amount you can file Chapter 13 for.
  • You cannot use Chapter 13 to erase taxes, child support, alimony, and student loans.

When Should File for Chapter 13?

Filing for bankruptcy is not a laughing matter, and should not be viewed that way. Know that filing for Chapter 13 bankruptcy will severely hurt your credit for at least 7 years.

Chapter 13 is better for individuals that have a high net worth with property but are burdened with debt.

It’s important to note while Chapter 13 does grant you temporary protection from foreclosure and repossession, you will still be required to catch up with past payments. However, this should have been made easier thanks to your repayment plan.

If you have been paying an excessively high interest rate on a large amount of debt you know you can’t pay off, bankruptcy could be for you. Although bankruptcy can ruin your credit for 7 years, you could be stuck paying off a certain debt for much longer.

With the added expense of interest payments each month, bankruptcy is a great way to save money as well. If your credit score is already far from perfect, bankruptcy can finally give you the chance to get a fresh start with your finances.


Chapter 7 vs. Chapter 13

Many consumers believe that Chapter 7 bankruptcy is the superior form of bankruptcy over A man sits down next to a gavel from a bankruptcy courtChapter 13 bankruptcy since your debts are completely erased in Chapter 7, but that’s not always the case.

If you own your home and are afraid of losing it due to burdening debts and lack of payments, Chapter 13 bankruptcy is for you.

This is because Chapter 13 will grant you temporary protection from the foreclosure process, while Chapter 7 doesn’t. This can also apply to your car.

Chapter 7 bankruptcy is a “liquidation”, where your assets are sold off to repay credits (this could include your home and car).

On the other hand, Chapter 13 is a “reorganization” effort that allows you to pay just a partial amount of your previous debts on an affordable payment plan.

While Chapter 7 can stay on your credit report for 10 years (the maximum time an entry can be on a credit report), Chapter 13 bankruptcy will remain for 7 years.

Also, consumers must qualify for Chapter 7 bankruptcy. The requirements are much more strict than Chapter 13 as well.

If you want to file for Chapter 7, you will have to take part in a “Means Test”. The court will take your average income for the past 6 months and compare it to the state average.

If your income is less than the state average, you should qualify for Chapter 7. Most consumers who do not qualify usually file for Chapter 13 bankruptcy.

If you have brought on a cosigner to any loan or form of credit, Chapter 13 allows the cosigner to be relieved from their obligation. Chapter 13 just offers much more protection than a Chapter 7 bankruptcy.

Most high net worth individuals who own assets will end up filing for Chapter 13 bankruptcy due to the fact that it does not require any liquidation of assets through an auction in order to repay creditors.


Final Note

Filing for bankruptcy is not an overnight choice. If you have been burdened with high-interest debt for some time now, you’re probably considering bankruptcy as an option.

Remember, bankruptcy was created to provide consumers with a form of protection when it comes to excessive debt.

By taking the time to be diligent and conduct proper research, you can ensure that all of your debts are erased and that you are on the path to rebuilding your credit.

Many consumers fear bankruptcy due to the worry that their friends and family members can find out. Although bankruptcy cases are a matter of public record (just like all court cases), your bankruptcy will not be published in newspapers or in the media.

The only way for a person to find out about your bankruptcy is if they go down to the local court and request the files in-person.

If you are buried under a mountain of debt and ready for a fresh start, CrediReady can help.

Our nationwide network of trusted and experienced lawyers are prepared to give you a FREE bankruptcy consultation to help you. Take a moment to fill out our inquiry form today to speak with your FREE attorney.