Chapter 13 Bankruptcy
Unlike a Chapter 7 bankruptcy, which permits the debtor to discharge her debts, a Chapter 13 proceeding does not discharge debts. Instead, a repayment plan is worked out where the debtor is required to pay the trustee a certain amount each month that the trustee then distributes among the creditors. Chapter 13 bankruptcies readjust the debts of individuals with regular incomes who have some money left over each month (after expenses) with which to repay their debts.
The repayment plans usually last approximately 3 to 5 years, and the debtor must report regularly to the trustee during that time regarding any income increases or windfalls. For example, a tax refund must be reported to the bankruptcy trustee who may then take it to pay creditors. There are strict rules in place with which a debtor must comply during the Chapter 13 process. Violating the rules or missing a payment means the bankruptcy can be dismissed and the debtor is still legally responsible for debts that were never discharged. Some debtors find that living under a Chapter 13 plan is extremely difficult and stressful; thus, discuss your decision to proceed under Chapter 13 with an attorney.
TIP: A Chapter 13 debtor who has a bankruptcy dismissed may not refile. Additionally, the debtor is prohibited from filing for a Chapter 7 bankruptcy. Do not file for a Chapter 13 bankruptcy unless you have every intention of following through with the repayment plan.
Can anyone qualify for a Chapter 13 bankruptcy?
No. Debtors with extremely large debts do not qualify. If you have more than $307,675 in unsecured debt (such as medical bills and credit card debt) and more than $922,975 in secured debt (such as real estate mortgages and car loans), you cannot file for a Chapter 13 bankruptcy.
I cannot keep up with the payments to the trustee. Can I convert my Chapter 13 bankruptcy into a Chapter 7?
Yes. However, in order to convert to a Chapter 7, you will have to show a substantial decrease in income or increase in expenses that are beyond your control and involuntary, such as job loss or large medical expenses.
Can a creditor fight my bankruptcy plan and try to keep what I owe from being discharged?
Yes. Creditors have the opportunity to dispute the plan at the time of the confirmation hearing.
TIP: All creditors are notified of the debtor's confirmation hearing by the bankruptcy court, which mails out a "Trustees Notice of Confirmation and Plan Summary."
Are any debts discharged in Chapter 13 bankruptcies?
Typically, no. Debts in Chapter 13 bankruptcies are adjusted. The amounts owing are generally reduced to an amount that is feasible for the debtor to pay back in 3 to 5 years.
TIP: The advantage of a 3-year plan is that the repayment time is shorter, which requires a lesser amount to repay. If a debtor can only pay $100 a month under a 3-year plan, the adjusted amount of the debt could not exceed $3,600 ($100 x 36 months), even if it was originally $50,000.
SIDEBAR: Under the bankruptcy reform bill, discussed below, debtors whose income exceeds the state median and who can afford to repay some of their debts must use a 5-year plan, which allows for a greater amount to be repaid to creditors.
Is it possible to have any debts discharged before the repayment plan is completed?
Yes. You can request a hardship discharge. The discharge will be granted if the debtor cannot keep up with a portion of the plan payments because of circumstances beyond her control.
If my plan ends and I still owe money, are the debts discharged?
Yes. Although most of your debts would have been reduced to allow for full repayment during the plan, any excess is discharged once the plan is completed. If you owed $50,000 on a credit card account and the amount was not adjusted, and you were placed on a 3-year plan paying $1,000 a month, at the end of the plan the amount still owed (over $45,000) is discharged.