What is Chapter 13 Bankruptcy?

Filing a Chapter 13 bankruptcy allows you to repay your creditors a reduced percentage of your debt based on what you can afford to repay. It also forces your creditors to accept the repayment according to the terms set forth by the bankruptcy court.

The main eligibility requirement for Chapter 13 bankruptcy is that you have a steady source of monthly income and an ability to repay at least a portion of your debts. Because of this, Chapter 13 bankruptcy is often referred to as the “wage-earner” Chapter of bankruptcy.

While it may sound a similar to traditional debt consolidation, Chapter 13 bankruptcies are much more complex and can provide you with significantly more debt relief and creditor protection. Chapter 13 bankruptcies are generally more complicated than Chapter 7 bankruptcies, and it is strongly recommended that you consult with a bankruptcy attorney if you are considering filing a Chapter 13 bankruptcy. Many times bankruptcy trustees and judges request that you hire an attorney if you file a Chapter 13 Bankruptcy without an attorney.

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Why Would You Want to File a Chapter 13 Bankruptcy?

A Chapter 13 bankruptcy can provide many different types of financial relief and benefit a variety of circumstances. Some of the more common reasons to consider filing a Chapter 13 bankruptcy are:

1. Your House is in Foreclosure
   If you are behind on your mortgage payments or already in foreclosure, filing a Chapter 13 bankruptcy forces your mortgage company to accept repayment of the arrears over a 3-5 year period and prevents them from continuing with any foreclosure proceeding.
2. Your Vehicle Is About to Be Repossessed
   If you are behind on your car payments, filing a Chapter 13 bankruptcy prevents your car from being repossessed. Once your bankruptcy is filed, your past due and future car payments become part of the consolidation plan and the finance company no longer can repossess your vehicle.
3. Your Vehicle Was Already Repossessed
   In certain Chapter 13 bankruptcies, it may be possible for a bankruptcy attorney to help recover your car after it’s been repossessed.
4. Your Wages Are Garnished or Assigned
   The filing of Chapter 13 bankruptcy immediately stops all garnishment and wage assignment deductions from your paycheck. It also stops any pending collection lawsuits from going any further, thus stopping any potential judgments from being entered against you.
5. You Need to Consolidate Government or Non-Dischargeable Debts, Such as Taxes, Student Loans, Parking Tickets, or Back Child Support
   While taxes, student loans, parking tickets and back child support can’t be discharged by either Chapter 7 or 13 bankruptcy, the filing of Chapter 13 bankruptcy allows you to consolidate these debts into a repayment plan and repay them over a 3-5year period. It also stops any collection activity against you such as impending tax liens, garnishment from student loans, and parking ticket boots.
6. Your Driver’s License Is Suspended
   Filing a Chapter 13 bankruptcy can get your driver’s license reinstated if it has been suspended by the government because you either owe money for an uninsured or underinsured accident in which you were involved, or for parking tickets. However, if drugs are alcohol are involved, your driver’s license cannot be reinstated.
7. The main eligibility requirement for Chapter 13 bankruptcy is that you have a steady source of monthly income and an ability to repay at least a portion of your debts.
   You Accumulated a Large Amount of Unprotected Equity in Your Home or Other Valuable Assets that You Wish to Keep
   Chapter 13 bankruptcy is an “assetprotection” Chapter, which means you can keep all over-exempt assets and still file for bankruptcy relief as long as you can afford your monthly repayment plan amount. The monthly Chapter 13 repayment amount is based on your disposable income and your assets.
8. You Want to Protect Cosigners from Your Mutual Creditors
   A cosigner of someone who files for a Chapter 13 bankruptcy receives the same protection under the Bankruptcy Code as the person who files. For example, if your mother cosigns on a credit card for you and you then file a Chapter 13 bankruptcy, the credit card company cannot pursue your cosigner mother if you are paying 100% of the debt back in a Chapter 13 bankruptcy.
9. You Have a Large Amount of Unsecured Debt
   In a Chapter 13 bankruptcy, unsecured debts like credit cards and medical bills can be paid back at a severely reduced percentage. In some jurisdictions, you may only have to repay as little as 0-10% of your unsecured debt. The remainder of the unsecured debt is discharged when you complete the Chapter 13 repayment plan. Your debts do not incur anymore interest or late fees after the bankruptcy is filed.
10. You Aren’t Eligible to File a Chapter 7 Bankruptcy
    You may only file a Chapter 7 bankruptcy once every 8 years, so a Chapter 13 bankruptcy is your only bankruptcy option if you need to file bankruptcy during the 8-year period after the filing of a Chapter 7 bankruptcy. However, while a Chapter 13 bankruptcy can be filed at any time, you will not receive a discharge if you file a Chapter 13 bankruptcy within 4 years of filing a Chapter 7 bankruptcy.

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Do I Qualify to File a Chapter 13?

Three basic requirements must be met to qualify for a Chapter 13 bankruptcy:

1. You must be employed or have a steady source of monthly income
   It is necessary to demonstrate to the court that you have sufficient income to fund a repayment plan. You must either be employed or have a stable income like social security, disability, or a pension. Occasionally, it’s even possible to qualify for a Chapter 13 bankruptcy depending on a relatives or household member’s income.
2. You must have enough disposable income
   You are required to demonstrate to the court that you have sufficient disposable income to afford a Chapter 13 monthly payment. You must provide a budget showing sufficient income for a monthly trustee payment after deducting all of your other expenses, such as your rent or house payment, food, clothing, transportation, utilities, etc.
3. The total of your debts cannot be too high
   Unsecured Debt is debt that no collateral is attached to, such as credit cards, medical bills, and some personal loans. If your unsecured debts total over $307,675, you do not qualify to file for Chapter 13 bankruptcy. Secured Debt is any debt that has collateral attached to it, such as mortgages or car payments. If the total of your secured debts is over $922,975, you also do not qualify to file for Chapter 13 bankruptcy.

   If you’re unsure whether your financial situation meets the three above requirements – whether your income is steady enough, whether you have enough disposable income, or whether you have too much debt – consult an experienced bankruptcy attorney who can evaluate your situation and determine if you are eligible for a Chapter 13 bankruptcy.

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The 341 Meeting of the Creditors

Must I Go to Court?

Yes, you are required to attend your 341 Meeting of the Creditors. It’s imperative that you attend this meeting, or your case may be dismissed. The proceeding normally takes place about 30-45 days after your bankruptcy petition has been filed with the court, and your bankruptcy attorney normally attends the meeting with you. The meeting is called a "341 Meeting" after the section in the Bankruptcy Code that requires it, U.S.C. 341.

Will my Creditors be at the 341 Meeting to Harass Me?

While its name, “The 341 Meeting of the Creditors,” implies otherwise, creditors in fact very rarely appear at these meetings. In most cases there is no defense to your filing of bankruptcy and it would be a waste of time for your creditors to attend the meeting. Also, your creditors can make any objections to your bankruptcy even if they don’t choose to appear at the 341 meeting.

What Happens at the 341 Meeting?

The 341 meeting is presided over by a bankruptcy Trustee. The Trustee’s job is to represent your creditors in the bankruptcy process and to help with the administration of your Chapter 13 case. The Trustee asks you a series of questions to determine if you are eligible for a Chapter 13 bankruptcy. Chapter 13 341 meetings generally take from 15-30 minutes, depending on the complexity of your case. The meetings are rather informal, but you do want to dress appropriately. Before the meeting, your bankruptcy attorney discusses any potential issues and help you prepare for any questions that the trustee may ask.

Initially, you are required to take an oath to tell the truth under penalty of perjury. You are then asked to state your name, social security number, and address for the record. After you verify your signatures on the filed bankruptcy petition, the Trustee asks you questions to verify the information provided on your bankruptcy schedules. Typically, the Trustee asks for details about any property you own, verify your income and expenses, and inquire whether you are expecting an inheritance or other large sum of money in the near future.

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The Role of the Chapter 13 Trustee

A Chapter 13 trustee is appointed by the government. The trustee represents the creditors involved your bankruptcy, and has many responsibilities throughout the Chapter 13 bankruptcy case. The trustee’s duties include overseeing the Chapter 13 process and making sure you fulfill the terms of your repayment plan.

The trustee reviews the accuracy and reasonableness of your plan and ensures that you are making a good faith effort to repay your debts. After approving your repayment plan, the trustee distributes it to your creditors, who then object or challenge your proposal if they believe that it is unreasonable.

The Chapter 13 trustee receives your monthly payments under the plan and is responsible for distributing those payments to your creditors. The trustee is also responsible for ensuring that you comply with the Bankruptcy Code and are not abusing the bankruptcy system.

The trustee represents the interests of your creditors in a Chapter 13 bankruptcy and can often take an adversarial role in your case. It is strongly recommended that you hire a bankruptcy attorney to represent your interests and help you through the complex Chapter 13 bankruptcy process.