There are two main ways to file personal bankruptcy under the U.S. Bankruptcy Code — Chapter 7 and Chapter 13. In a CH 7, your assets are liquidated to pay off your debts and then you are given a clean slate, so to speak. In a CH 13 filing, you are given 3 to 5 years to pay off your debts and you are able to keep all of your assets. Of course, there is a lot more to each type of bankruptcy and in this article we will address the most frequently asked questions regarding filing Chapter 13 BK.
Overview of Chapter 13 Bankruptcy
Chapter 13 bankruptcy is also known as a reorganization bankruptcy. It is filed by individuals who want to pay off their debts over a period of three to five years and it appeals to people who do not want to liquidate non-exempt property.
Chapter 13 is also an option for individuals who have sufficient income to pay their reasonable monthly expenses and have money left over to pay off their debts. In other words, CH 13 is for someone who did not pass the Means Test and cannot file for CH 7 bankruptcy.
What is the Difference Between Chapter 13 and Chapter 7?
One of the main differences between Chapter 13 and Chapter 7 bankruptcy, is the ability of a debtor to retain certain assets that would otherwise be liquidated by a Chapter 7 bankruptcy trustee. In most cases, you can keep your home and your car under either plan, provided your equity does not exceed certain limits. However, under CH 7, you wouldn’t be able to keep your rental properties, antique gun collections, etc.
The goal of most Chapter 7 bankruptcies is to discharge your existing debts and allow you a “fresh start” on your finances. In other words, once your discharge is granted, you no longer need to repay the debts that were incurred before you filed your bankruptcy.
Under a Chapter 13, however, you repay most or all of your debts before your slate, so to speak, is wiped clean. And because you repay your debts, you gain certain advantages over a Chapter 7 BK.
Who Can File for Chapter 13 Bankruptcy?
An individual with regular income, who can pay for their living expenses but cannot keep up with the payments on their debts. However, filers can have only so much debt. As of April 2019, the current debt limitations are:
- $1,257,850 of secured debt, and
- $419,275 of unsecured debt.
What Are The Benefits of Filing CH 13?
Chapter 13 bankruptcy protects individuals from the collection efforts of creditors; permits individuals to keep their real estate and personal property; and provides individuals the opportunity to repay their debts through reduced payments. Another benefit is that the time your Chapter 13 bankruptcy shows on your credit report is less, so it takes less time to repair your credit after a bankruptcy.
You may be able to discharge debts in a Chapter 13 bankruptcy that would be non-dischargeable under other chapters, for example, fraud judgments.
What Are The Benefits of Filing CH 13?
You must qualify for the payments determined by the courts. You can use the following income:
- regular wages or salary
- income from self-employment
- wages from seasonal work
- commissions from sales or other work
- pension payments
- Social Security benefits
- disability or workers’ compensation benefits
- unemployment benefits, strike benefits, and the like
- public benefits (welfare payments)
- child support or alimony you receive
- royalties and rents, and
- proceeds from selling property, especially if selling property is part of your primary business property.
How Long Does it Take to Pay Off a Chapter 13 Bankruptcy?
The size of your monthly plan payments is determined by the amount you can afford to pay after paying necessary living expenses; i.e., insurance, car payment, mortgage payment, food, utilities, etc.
Typically, the payments last for 36 months, unless additional time is requested, but in no event will they last more than 60 months. Therefore, if your payment analysis shows, for example, that you can afford to pay $200.00 per month (above and beyond your normal living expenses), you would pay that each month to the Chapter 13 Trustee, who would disperse it pro-rata among your creditors. At the end of 36 months, you are discharged from all dischargeable unsecured debts, regardless of how much your creditors have received.
In addition to your plan payments, you must stay current with any ongoing obligations you have to secured creditors, such as on your mortgage. Chapter 13 (or any type of bankruptcy for that matter) only affects debts that you owe on or before you filed the bankruptcy. Therefore, on your mortgages and other secured debts, your Plan payment goes to pay any arrearages that existed on the date you file and you can repay that arrearage over the life of the Plan; but, you must stay current from the filing date forward with any mortgage payments, etc.
Secured debts (your mortgages) must be repaid in full, but CH 13 enables you to cure the defaults (reinstate the loans) over 36 months (or up to 60 months with creditor consent and court approval). You also have the ability to eliminate junior liens from your real property (your mortgages) under certain circumstances and restructure mortgage and other payments.
However, under the CARES Act, you may be able to extend the payments to 84 months. However, the CARES Act will sunset on March 27, 2021.
What Are the Disadvantages to Filing for Chapter 13 Bankruptcy?
If you miss any payments at all that are due under your Plan, your case will be dismissed by the Court. Also, generally speaking, a CH 13 case is a bit more expensive to file than a CH 7 case — sometimes running $1,000 to $1,500 more in filing fees than a Chapter 7 bankruptcy filing. In addition to your filing fee:
- the trustee’s commission (3% to 10% of each monthly payment), and
- attorney’s fees, if you hire an attorney for help with your Chapter 13 bankruptcy (which is advised).
What will I have to Pay Back?
Priority debts will be paid 100%. These include:
- back alimony and child support
- most tax debts (including state and federal income taxes)
- wages, salaries, or commissions you owe to employees, and
- contributions you owe to an employee benefit fund.
Mortgage defaults will be paid 100% if you want to keep your house.
Other secured debt defaults will be paid 100% if you want to keep the property. Missed car payments fall into this category.
Unsecured debts will be paid anywhere from 0% to 100% of what you owe. The exact amount depends on:
- the total value of your nonexempt property
- the amount of disposable income you have each month to put toward your debts, and
- how long your plan lasts.
Will a Chapter 13 Bankruptcy Affect my Credit?
Yes. A CH 13 bankruptcy will stay on your credit report for 7 years after you file, as opposed to 10 years if you file CH 7 BK. Other accurate negative reports on your credit must be removed after 7 years, such as late payments on credit cards, foreclosures, etc.
Your credit will most definitely be less damaged than had you completed a Chapter 7. However, the usual limitations will apply until the bankruptcy disappears off of your report: You will not get as high a credit limit as you once had nor will you be able to borrow a large sum of money. But getting some credit, such as a secured credit card, shouldn’t be that difficult and you will be able to rebuild your credit over time.
What you will likely face is not unlike a person with a Chapter 7 on their credit report: higher interest rates, required higher down payments, more points, etc. But you will be treated more leniently than a person with a Chapter 7 bankruptcy. For instance, mortgage lenders will give you the benefit of the doubt, giving you preferred credit status over those filing Chapter 7.