Chapter 13 bankruptcy is a debt repayment plan that protects the debtor from collection action during the plan and discharges (forgives) any unpaid balance of dischargeable debts at the end of the plan. Chapter 13 is available to individuals that have regular income and have liquidated, unsecured debts not exceeding $383,175 and secured debts not exceeding $1,149,525.
When a debtor files bankruptcy under Chapter 13 his debts are consolidated and he proposes a repayment plan to repay all or a portion of his debts over a 3 to 5 year period. Payments under the plan are made to a court-appointed trustee who disburses payments to creditors. In most cases, the amount of the debtor’s Chapter 13 payment is the amount he has left over each month after paying all of his allowable living expenses.
While the Chapter 13 plan is in effect, creditors cannot contact the debtor, sue him, garnish his wages or repossess or foreclose on any of his property. Unlike Chapter 7 bankruptcy, cosigners and codebtors are also protected.
Chapter 13 allows the debtor up to 5 years to catch up on delinquent mortgage and vehicle payments. Unsecured mortgages can be “stripped off” altogether if there is no equity in the property to support the mortgage.
In many cases, Chapter 13 will reduce the principal balance and interest rate on vehicles and other collateral that the debtor wants to keep (other than his primary residence). In many cases, vehicle payments can be reduced by as much as 50%.
Unsecured debts (debts that are not secured by collateral) are normally discharged (forgiven) after 36 months, regardless of the remaining balance owed. If the debtor’s annual gross family income is more than the median family income for his state and family size he will normally have to pay for 60 months before the balance of his unsecured debts is discharged. No interest accrues on most unsecured debts during the repayment period.
Even if the debtor has filed a Chapter 7 bankruptcy within the past 8 years or has non-exempt assets he can file a Chapter 13 bankruptcy.
A Chapter 13 bankruptcy proceeding is commenced by filing Official Bankruptcy Forms in the U.S. Bankruptcy Court. These forms require a debtor to list all of his assets and debts, along with some recent financial information. This is the most important and time-consuming part of a bankruptcy filing. A proposed Chapter 13 repayment plan is also required to be filed.
It is important that every creditor is listed on the bankruptcy forms with an accurate mailing address. All debts must be listed, even if a particular debt is non-dischargeable.
The bankruptcy forms are signed by the debtor under penalty of perjury then filed with the bankruptcy court clerk in the district in which the debtor resides, or has resided for the greater part of the last 180 days.
To file an individual or joint Chapter 13 bankruptcy, a court filing fee in the amount of $310 must be paid to the U.S. Bankruptcy Court at the time of filing or within 4 monthly installments. The Chapter 13 filing fee cannot be waived.
A Chapter 13 bankruptcy is effective immediately upon filing and an “automatic stay” immediately stops all collection activity, including foreclosure, repossession, garnishment, lawsuits, creditor contact, etc.
The bankruptcy court will mail notice of the bankruptcy filing and automatic stay to each of the creditors listed on the debtor’s bankruptcy forms. Any creditor that violates the automatic stay by attempting to collect a debt from the debtor may be held in contempt of court and punished by fine or imprisonment.
About 4-6 weeks after the bankruptcy filing date, the debtor must attend a “341a meeting” (also known as a “meeting of creditors”). At the 341a meeting, the trustee will ask the debtor a few questions regarding his financial situation. The meeting in a typical consumer case lasts about 3-4 minutes and creditors virtually never attend the meeting.
In some bankruptcy court districts, the debtor must also attend a brief confirmation hearing in court to have their proposed repayment plan approved.
Upon completion of all payments provided for in the Chapter 13 plan, the debtor receives a final discharge of any remaining balance due on all dischargeable debts.