What is Chapter 13 bankruptcy and how does it work?
Chapter 13 bankruptcy is a part of the federal bankruptcy law that gives debtors relief from creditors. It permits debtors to repay part or all of their debts under the protection and supervision of the bankruptcy court. Under this proceeding, the debtor submits a repayment plan to the court, which must be approved by the same court before it becomes effective.
Under Chapter 13 bankruptcy plan, the debtor can suffer no penalties and accrue no interest on most debts. The debtor is under obligation to make regular structured payments to the Chapter 13 trustee for a specific period of time as stated in the plan. Once the repayment is complete, the debtor is discharged from any liability for his or her remaining debts.
When Do Chapter 13 payments begin?
Under the Chapter 13 plan, a debtor will begin making payments within 30 days after the bankruptcy is filed with the court. The debtor must ensure compliance with the repayment plan.
Payments can be made weekly, bi-weekly, or monthly – the payment plan should be convenient for the debtor but must be made regularly. If the debtor is employed, the court may request that the employer makes the payments. Otherwise, the debtor may make the payments himself.
How long does a Chapter 13 plan last?
A Chapter 13 repayment plan will last for at least 3 years, but this length of time may be extended to 5 years, if the debtor has a valid reason for this request or if the debtor’s income requires. If the debtor pays 100% of their debt the plan can be shorter than 3 years. The length of the plan begins upon confirmation of the plan.
Must your Chapter 13 plan be approved by all creditors?
No. Only a court can approve a Chapter 13 plan for it to become effective. The court will only approve the plan if unsecured creditors are allowed to file objections to the repayment plan and secured creditors are treated appropriately. The secured creditor:
- May accept the proposed repayment plan;
- May have control over the collateral;
- May have control over the lien and be paid the complete amount of the secured claim under the repayment plan;
- May have a relationship outside the repayment plan.
What is the difference between Chapter 13 and Chapter 7?
Under Chapter 13, the debtor is usually allowed to retain his or her nonexempt property but is under obligation to repay as much of the debt as the trustee deems feasible. The debtor is then discharged from liability to the remainder of the debt. It also allows the debtor to catch up on mortgage payments, property taxes, income taxes, and delinquent car payments.
Under Chapter 7, all or most of the debtor’s nonexempt property is liquidated and he or she is released from liability of the remainder of the debts. Most cases do not have a nonexempt property and the bankruptcy discharges all unsecured debt and allows the debtor to surrender a vehicle or real property. Chapter 7 cases are typically less expensive and take less time, but Chapter 13 bankruptcy allows debtors with a large number of nonexempt assets and above median income to retain their assets and enjoy the protection of bankruptcy.
When is Chapter 13 more preferable to Chapter 7?
Chapter 13 bankruptcy is preferable for a debtor who:
- Is not eligible for Chapter 7 Bankruptcy discharge;
- Has valuable nonexempt property which could be lost if they file for Chapter 7;
- When the needs to cure delinquent payments on the home, other real property, or a vehicle;
- To stop foreclosure, property tax sale, or repossession;
- Has substantial debt that cannot be discharged under Chapter 7;
- Has sufficient assets enough to repay creditors but need temporary relief to do so;
- Wishes to repay most or all unsecured debts and have to required income to achieve that within a reasonable timeframe.
What is the fee for filing for Chapter 13 bankruptcy in court?
Debtors who want to file Chapter 13 bankruptcy are required to pay a fee of $310 to cover general court expenses and the cost of assigning a trustee to your case.
What is a Chapter 13 discharge?
This is a court order that releases a debtor from all of his or her debts provided for by the bankruptcy plan. A discharged debt is one that a creditor cannot attempt to collect from the debtor, and discharge only takes effect once the Chapter 13 repayment plan is complete. If the plan is not complete due to circumstances beyond the debtor’s control, the debtor may be entitled to a partial discharge or may need to convert the bankruptcy case to Chapter 7.
How much can I discharge in Chapter 13 bankruptcy?
There are limits to how much a debtor can discharge in a Chapter 13 bankruptcy, unlike Chapter 7 where there are no limits. You can discharge up to $360,475 in unsecured debts (personal loans, debts on an old credit card, etc.). Secured debts (real estate and financed vehicles you currently own) of up to $1,081,400 can also be discharged in Chapter 13. However, amounts that can be discharged change from time to time.
What debts are not discharged under Chapter 13?
Upon completion of the repayment plan, Chapter 13 bankruptcy releases all debts except:
- Student loans;
- Those repaid outside the repayment plan;
- Alimony or support;
- Indemnification, or a criminal fine, which is part of the debtor’s criminal conviction;
- Personal injury or death caused by the debtor’s ill-handling of a vehicle if it is done under the influence.
- Any debts that were deemed non-dischargeable by the court
Must all debts be paid in full under a Chapter 13 plan?
No. Priority debts like tax debts, child support, and spousal support must be completely paid off under a Chapter 13 plan. The debtor must also cure or pay all secured debts when the debtor is keeping the collateral. But for most debts, the debtor is allowed to pay only what he or she can reasonably afford. Upon completion of the Chapter 13 plan, the unpaid balance may be discharged.
About the Author: Roxane Kaye, has been practicing law since 2002. She is admitted to practice law in Michigan state courts and before the Federal Bankruptcy Court of Eastern Michigan, Southern Division, as well as the Federal District Court of the Eastern District of Michigan. Roxane covers cities such as Burton, MI, Flint, MI, Fenton, MI, Beecher, MI, Lapeer, MI, Waterford, MI, Auburn Hills, MI, Pontiac, MI, Howell, MI, Owosso, MI, Wixom, MI, Rochester, MI, Rochester Hills, MI, Novi, MI, and South Lyon, MI.
