A Chapter 13 is a bankruptcy that involves a three to five year repayment plan. Some debtors have to file a Chapter 13 because their household income is high enough to pay at least some percentage of all their debt. Some people choose to file a Chapter 13 because of the options it offers. You can get caught up on mortgage payments, consolidate car payments, take care of back taxes, pay back child support, reinstate drivers licenses that have been suspended for fines and protect property in a Chapter 13. If you have filed a Chapter 7 in the past four years, you have to file a Chapter 13 to get a discharge.
In a Chapter 13, a trustee is appointed to receive the payments and disburse the money among creditors according to the Chapter 13 plan. The amount of the payments is determined by subtracting a budget from the debtors monthly income. A means test is used to determine this payment. A projected budget is also used to show what the payment should be going forward. Because the means test only measures the last six months of income, sometimes it doesn’t tell the whole story. First expenses for secured debt are deducted – these debts include mortgage payments and any amount you might be behind and car payments. Debts like back taxes and child support are deducted next. The last debt to be paid is called general unsecured debt, which may end up being paid only pennies on the dollar – often 0% in fact. Even if the payment to unsecured creditors ends up being 100%, a Chapter 13 will stop interest and late charges. A Chapter 13 is much easier than dealing with wage garnishments. It provides and orderly way of paying debt back all at once. Unlike non-bankruptcy credit consolidation plans, it can include all kinds of debt and is more secured because it is all done under the protection of the bankruptcy court. If a creditor does not file claim in the case, they can not collect after the case is finished. Creditors have to go along with the Chapter 13 case.
The only hearing a Chapter 13 debtor will probably have to attend is called a meeting of creditors. Creditors rarely show up to these hearings. At the meeting of creditors, the debtor and his or her attorney appear at the hearing where the trustee goes over the bankruptcy paperwork, pay stubs, bank statements and tax returns. The trustee examines the plan to make sure it will complete within five years and it complies with all the bankruptcy laws. A bankruptcy judge must approve the plan. The trustee or any creditor can object to the plan. Any objections are usually handled out of court but they may involve a hearing before a bankruptcy judge. The debtors attorney will argue the objections before the judge and the debtor usually does not have to attend. Once the plan is approved, or “confirmed” they just have to keep making the payments and will eventually get a discharge for any debt that is not paid. However, this debt must be dischargeable. In some cases, debt such as student loans or fines remains after the Chapter 13 ends. At the end of the case, the debtor receives the title for any car paid off. If the mortgage was in arrears before the case was filed, those payments are caught up and the debtor just keeps making the payments. Sometimes a Chapter 13 debtor can totally remove a second mortgage from the title of their house if they balance of the first mortgage was higher than the houses value when the case was filed. Because there are so many complicated steps to confirm and complete a Chapter 13, most people who try it by themselves fail. Trustees and the courts strongly advise that Chapter 13 use an attorney for their case.