Chapter 13 bankruptcy is a repayment proceeding, but you still enjoy the benefits of the automatic stay of a bankruptcy while repaying your creditors over a three to five-year period.
Many people with small businesses that are not corporate entities but wish to remain in operation choose Chapter 13, although they cannot file in their business name but as individuals who are including their business debts for which they are personally liable. Consumers who do not qualify for a Chapter 7, who may have real estate other than their homes, or who wish to stop a foreclosure opt for the Chapter 13 proceeding.
Anyone who is considering filing a Chapter 13 still has to qualify. Your unsecured debt cannot be more than $360,475 and your secured debt cannot exceed $1,081,400. These figures do change periodically and are adjusted for inflation.
You also could not have filed a bankruptcy petition within 180 days of filing that was dismissed by the bankruptcy court for your failure to comply with a court order.
You also have to demonstrate to the court that you have sufficient disposable income to meet your repayment obligations under an approved plan. Your disposable income is determined by subtracting from your gross income all reasonable living expenses and loan payments, such as auto and mortgage obligations.
Your income can come from any number of sources including welfare, child support, spousal maintenance, pension, or disability. If you are married and not working, you can use the income from your spouse.
You must also be current on your income tax filings for the past four years before filing and produce your returns or transcripts. If you have not filed, you should seek assistance in getting your returns filed and up-to-date.
Finally, you are required to take a credit counseling class within six months of filing your petition. Most bankruptcy law offices offer this service.
The central feature of a Chapter 13 is your repayment plan. You should retain a bankruptcy attorney to prepare the plan for you and to ensure that it meets the above requirements and is approved by the trustee overseeing your case.
If approved, you will have to make one monthly payment over the term of the plan. If you have a job, the payment amount can be automatically deducted from your paycheck.
Benefits of a Chapter 13
A Chapter 13 will stop any collection activities. For debtors with second or vacation homes, they can retain these properties so long as their secured debt is within the limits.
For distressed homeowners facing foreclosure, they can stop foreclosure proceedings but they must have enough disposable income to meet current mortgage payments and to pay off arrearages within 5 years.
For homeowners with multiple mortgages, a Chapter 13 may eliminate those payments. If your first mortgage is entirely secured by the value of the home, especially if it is more than the home’s value, there is no remaining equity and the subsequent mortgages are considered unsecured.