Chapter 13 bankruptcy

Chapter 13 bankruptcy overview

As you research bankruptcy options, you may wonder what chapter 13 bankruptcy entails and if it’s right for you. This form of bankruptcy lets you pay back many debts, but there are income and debt level requirements.

Chapter 13 bankruptcy key terms

Understanding chapter 13 bankruptcy is easier when you know what some of the legal terms mean.

• Debtor: In a bankruptcy proceeding, you are the debtor; the person who owes money.

• Creditor: The people and companies to which you owe money, like credit card companies or service providers.

• Trustee: The person who oversees your bankruptcy proceeding. He or she reviews your bankruptcy petition, your payment plan, and creditor claims. The trustee also accepts your monthly payments and distributes them to your creditors according to your plan.

• Repayment plan: Your plan for how you will repay your non-dischargeable debt and as much of your dischargeable debt as possible.

• Discharged debt: Debt the court has ruled is no longer your responsibility.

• Priority debts: The debts your plan has to pay off first. Any debts that can’t be discharged are in this category.

• Secured debts: Loans for which you have put up collateral (property pledged as promise of loan repayment, often a house or car). If you wan to keep the collateral, you’ll need to bring your loan current.

• Unsecured debts: Debts not secured by collateral. How much of these you’ll have to pay back depends on things like your income and the length of your repayment plan.

How chapter 13 bankruptcy works

In chapter 13 bankruptcy you create a payment plan to pay off some or all of your debts over time. There are rules for which debts take priority, the length of your plan, and how much debt you can have.

Once you finish your plan payments all remaining dischargeable debt goes away.

This bankruptcy form is available only to individuals or couples. Business owners can include business debt they are personally liable for in their payment plans.

Chapter 13 bankruptcy is different from chapter 7 in that you can keep all your assets. You use future income to make the payments.

It’s similar to chapter 11 bankruptcy, but chapter 11 doesn’t have any debt limits.

Eligibility to file under chapter 13

• You have not had debt discharged under chapter 13 within the past 2 years or chapter 7 within the last 4 years.

• You haven’t had a bankruptcy case dismissed within the past 180 days.

• You have completed credit counseling (this must be done before filing).

• You meet the debt limits. These limits change every 3 years. They were adjusted in 2013 to be no more than $383,175 in unsecured debts and $1,149,525 in secured debts.

• You have filed your federal and state tax returns for the past 4 years.

• You have enough income to pay off your debts according to your proposed plan.

If you’ll have debt remaining at the end of your plan, you’ll also need US Trustee-approved budgeting and debt management counseling before it will be discharged.

Pros and cons of filing chapter 13 bankruptcy

You’ll have to decide for yourself if the advantages outweigh the disadvantages.

Advantages of filing chapter 13 bankruptcy:

• You have time to pay off your debts, without creditors hounding you.

• Unlike a chapter 7 bankruptcy you may keep your assets, as long as you can bring the payments up to date.

• A bankruptcy on your credit record can be less damaging than defaults and lawsuits.

• Once your payment plan is complete, your creditors can’t force you to pay any remaining balance (as long as it is dischargeable debt).

Disadvantages of chapter 13:

• It takes a long time, up to 5 years.

• Your repayment plan will use up basically all of your disposable income for the length of the plan.

• Your bankruptcy will stay on your credit report for up to 10 years (they’re usually removed after 7).

• You’ll lose your credit cards.

• Getting new credit with the bankruptcy on your record will be hard. For some types of loans, like a mortgage, there may be a waiting period after your discharge. You may have to accept higher interest rates and harsh terms on all loans and credit cards.

Keep in mind that certain debts will survive any kind of bankruptcy. These include child support, federal student loans and wages owed.

A bankruptcy lawyer can help you understand your situation and answer any other chapter 13 bankruptcy questions you may have.