Under Chapter 13 of the U.S. Bankruptcy Code, no liquidation applies. Instead, an individual is given an opportunity to repay all his or her debts as outlined in a tightly controlled budget plan that is overseen by a trustee, who is appointed by a bankruptcy court.
How Chapter 13 Works
Chapter 13 is basically meant to help an individual reorganize his or her debts by coming up with a suitable repayment plan. It ensures that certain creditors are paid within a specified period of time.
The court will then determine your disposable income, and that amount becomes the basis for your monthly payment plan.
In some instances, you may be relieved from having to repay certain specific creditors, but this will depend on a number of complex factors. In others, you may still have to repay them, but with a significantly lower total balance. In fact, under Chapter 13, some creditors receive only pennies on the dollar — and that can help you turn a financial mess into a manageable situation.
Meanwhile, certain other kinds of debts are given high priority and must be included in the repayment plan. This includes things like child support and tax debts.
How to Qualify for Chapter 13 Bankruptcy
Not everyone qualifies for protection under Chapter 13. To be eligible for this kind of bankruptcy, you must:
- Be an individual. Businesses cannot file for bankruptcy under Chapter 13.
- Be up to date with your tax returns. You’ll need to show the court that you’ve properly submitted your tax filings for each of the last four years.
- Have sufficient disposable income. The court will need to see evidence that you have enough income to pay your allowed monthly expenses, plus the payments you’re already required to pay on secured debts (such as car loans and mortgages), and your repayment obligations under your Chapter 13 plan. We will discuss how to determine your disposable income and payment plan amount in greater depth in the next section.
- Not have debts that are too high. To qualify for Chapter 13, the total sum of all your secured debts cannot exceed $1,184,200. The total sum of your unsecured debts cannot exceed $394,725. (These amounts are adjusted for inflation every few years.)
- File in good faith. This simply means that you should have all the right intentions to follow the repayment plan as it is (and not to commit any fraudulent activities, like misrepresenting your income).
Determining Your Income and Payment Obligations for Purposes of Chapter 13 Bankruptcy
The court begins by determining your disposable income. The formula for disposable income looks like this:
Disposable income = Your total income – The amount you pay each month for secured debts and certain other allowed expenses
You should expect to pay all of your disposable income to your unsecured creditors. The court will set a specific amount according to how much disposable income you earn.
Most repayment plans last about five years, though some finish in as few as three years. The length of the plan will depend on the amount of the debt and the size of your income.
Remember This Prior to Filing Chapter 13 Bankruptcy
Even though Chapter 13 bankruptcy is considered one of the most favorable bankruptcy chapters, it still comes with its own unique restrictions.
For starters, you must strictly adhere to the repayment plan. If you fail to make the payments on time, you will face stringent consequences.
After adhering to the terms of the repayment plan, all your debts will be discharged. This can take several years, so you need to be patient. Remember: you’re in this for the long haul, but in most cases, it is certainly worth it.
Note: non-dischargeable debts, like child support, will still remain in place at the end of the repayment plan.
Bankruptcy Isn’t a Bad Word
Don’t let the mere idea of “bankruptcy” as a bad word scare you away from a solution that could change your life.
Unfortunately, society attaches a stigma to bankruptcy that it really doesn’t deserve. Some people tend to think of bankruptcy as a bad thing, but in many ways, it is a good thing — a source of protection and a truly manageable plan for getting yourself out of debt once and for all.
Mistakes are easy to make, though, so it’s important to take the right steps at each turn along the way.
What You Should Do Before Filing for Chapter 13 Bankruptcy
Bankruptcy isn’t anything to take lightly. Filing under Chapter 13 is a decision you should make carefully. While it can be a source of financial salvation for so many Americans, it isn’t necessarily right for everyone. Talking with an experienced advisor can help you make the right choice.
Hames, Anderson, Whitlow & O’Leary, P.S. has the knowledge and experience you need to get through this trying time as quickly and efficiently as possible with the best possible outcome for your case.
If you’re in need of sound legal advice from Kennewick, Pasco, or Richland bankruptcy attorneys, please turn to HAW Law. We can give you the experienced, strategic guidance you need to navigate this all-important chapter in your life.
Financial freedom may be only a few years away. A new start awaits at the end of the road. Let’s walk there together.
Don’t Lose Any More Money. Now Is the Time to Act.
At Hames, Anderson, Whitlow & O’Leary, P.S., we serve both creditor and debtor bankruptcy needs for people living throughout the Tri-Cities area (Richland, Pasco, Kennewick, West Richland), as well as the surrounding communities, including Hermiston, Benton City, Prosser, Grandview, Sunnyside, Finley, Burbank, Desert Aire, Mattawa, and Othello.
There’s a lot to know about bankruptcy, but it’s worth taking the time to learn.