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The U.S. bankruptcy code allows people who are insolvent to either eliminate legally dischargeable debts or restructure payments in a way that makes them solvent.

Also known as a wage earner’s plan, a Chapter 13 bankruptcy is designed for debtors who have regular income.

Because of the reliable income stream, it’s possible for the debtor to pay back some or all his or her debts provided that the payment terms are modified to make them affordable. A Chapter 7 bankruptcy, in contrast, wipes out any dischargeable debts.

In a Chapter 13 bankruptcy, debtors submit a repayment plan to the court. This repayment plan must be for three years if the debtor has monthly income that is less than the state median and five years if income is above the state median. If approved by the court, the debtor makes the scheduled payments to creditors and creditors remain barred from engaging in their own collection efforts. They may receive payments only through the court in accordance with the plan.

Advantages of Chapter 13

The Chapter 13 bankruptcy is often referred to as the home-saver bankruptcy. If a Chapter 13 petitioner’s plan gains court approval and payments are made as agreed, the lender remains legally barred from pursuing a foreclosure action. For debtors who become insolvent but have substantial home equity, Chapter 13 bankruptcy often becomes the logical option. In a Chapter 7, the home would have to be sold and the home equity seized to pay creditors; however, many states allow Chapter 7 debtors to keep homes if equity is below a low threshold.

Another advantage of a Chapter 13 is that secured debts, such as a vehicle loan, can be rescheduled and extended through the end of the plan, which may lower the payments. Chapter 13 also protects any co-signers to the debtor’s loans. Chapter 13 bankruptcy also works like a consolidation loan, allowing debtors to reduce payments and interest rates and make one lower monthly payment for all debts.

Chapter 13 Eligibility

All U.S. individuals with unsecured debts under $394,725 and secured debts under $1,184,200 can file a Chapter 13 bankruptcy at any time. An exception has been created that holds debtor’s ineligible to file if, in the prior 180 days, a prior bankruptcy petition has been dismissed due to a willful failure to appear in court or comply with a court order. In addition, a petitioner must complete credit counseling less than 180 days before filing.

Filing the bankruptcy petition and the automatic stay

Chapter 13 bankruptcies are filed in the county where the debtor is domiciled. The petition includes the following:

• Schedules of assets and liabilities.
• Schedule of current income and expenditures.
• Schedule of executory contracts and unexpired leases.
• Statement of financial affairs.
• Certificate of credit counseling.
• Evidence of any employment income received within 60 days of filing.
• Statement of monthly net income.
• Statement of any anticipated post-filing income increases.
• Statement of interest received in tax-advantaged education accounts.

The debtor must also provide the bankruptcy trustee with the previous year’s tax return and all tax returns filed while the Chapter 13 remains active.

The moment a Chapter 13 is filed, the automatic stay takes effect. This provision requires all creditors to cease collection activities. The automatic stay remains in effect until the bankruptcy case is over. Creditors receive notification from the court ordering them to halt all collection activities. The automatic stay stops lawsuits, wage garnishments and telephonic collections. It also protects co-debtors. Foreclosure proceedings stop the moment the automatic stay goes into effect; nevertheless, the debtor may still lose the home if the foreclosure sale is completed prior to the bankruptcy filing.

Courts require Chapter 13 petitioners to file a repayment plan with the petition or no more than 14 days after the filing date. The trustee schedules a meeting of the creditors, which the petitioner must attend. During this meeting, the trustee interviews the petitioner regarding his or her financial condition in order to verify that the debtor’s situation and the proposed plan meet guidelines. The next step is a plan confirmation hearing, where a judge decides if the plan is ready for court approval.

Chapter 13 bankruptcies provide tremendous relief for households with significant assets that are battling insolvency. Though the process is longer and the and costs are higher than a Chapter 7, it is the only option for those with significant assets that are subject to seizure in a Chapter 7. Millions of Americans have used Chapter 13 bankruptcies to save their homes because the automatic stay provides an insurmountable foreclosure defense.

If your debt is making it difficult to pay your bills, personal bankruptcy might be an option and the bankruptcy attorneys at Hines Law can help. We have over 15 years of experience in all types of debt relief matters and can help you get your financial life back on track. Call us and speak with an experienced personal bankruptcy attorney today!