Understanding the Basics of Chapter 13 Bankruptcy
What is Chapter 13 Bankruptcy?
Unlike a chapter 7 bankruptcy, where you must sell your assets to pay off creditors, chapter 13 allows you to reorganize your financial life so that you can keep your property. In chapter 13, you create a payment plan to pay off your debts. You submit the plan to the court for approval. You can also choose to pay your debts from any current assets you have.
As chapter 13 allows you to keep and use all your possessions, how much property you own will play a significant role in determining how much you have to repay. So if you own $10,000 in property that is not exempt, you must be able to repay at least $10,000 during your repayment period. In bankruptcy you have property that is exempt and non-exempt. Exempt property is that property the bankruptcy laws have determined you will need in order to have a fresh start after your bankruptcy. Examples of exempt property include clothing, your home, or car. There are limitations on the value you can exempt. Non-exempt property is property that falls outside this definition. To learn more about exempt property, you can go to this article.
The reason the court will look at how much property you own that is not exempt, is to make sure that your creditors would get at least as much money from your chapter 13 bankruptcy as they would under a chapter 7 bankruptcy. Because you have to sell your non-exempt property under chapter 7, this amount has to be figured out in order to make sure your payment plan will produce as much money as selling your assets. At the completion of your payment plan you receive a discharge that is similar to a chapter 7 bankruptcy discharge.
Who Can File Chapter 13 Bankruptcy?
As in a chapter 7 bankruptcy, there are certain eligibility requirements. You must receive a credit counseling briefing within 180 days before filing. This counseling will be completed with an approved agency. As our client, we can provide you with a list of those agencies approved. The counseling can be done over the phone, internet, or in person. You must also live or have a place of business or property in the United States. The other important part of the eligibility requirements is that you must have “regular income.”
The “Regular Income” Requirement
The United States bankruptcy laws define an individual with regular income as someone “whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13.” When we think of income, we might only consider a job where a person receives a regular paycheck. However, regular income could also include government benefits, alimony, or commissions.
A husband or wife of a person with regular income can file jointly or file separately. The reason for this is to ensure that the individual or couple filing has enough money available to make plan payments. This could include money received from family members depending on the documentation available to prove that income. In addition to the regular income requirement, there are limits on the amount of debt you can have to qualify for chapter 13.
What If You Have Prior Bankruptcies?
If you’ve had a bankruptcy dismissed with the last 6 months, you may not be able to file a chapter 13 bankruptcy. If the dismissal was because you failed to appear before the court or did not follow a court order you are not eligible. The other limitation is if one of your creditors asked to have the automatic stay lifted and you then requested that your bankruptcy case be dismissed. Read on to learn more about the automatic stay.
The automatic stay that goes into effect when you file chapter 13 bankruptcy stops your creditors from trying to foreclose or repossess any of your property. It also requires all creditors to stop sending letters or calling to try and collect on the debt. Limiting individuals from refilling within the 6-month period keeps people from using the bankruptcy laws to avoid legal action being taken by creditors by filing, then asking for a dismissal, and refilling again without ever completing the plan.
If you file chapter 13 bankruptcy, there are several reasons that would keep you from receiving a discharge. If you cannot prove that your child and/or spousal support payments are up-to-date, you did not complete the credit counseling course, showthat you met the requirements for a plan, or that the discharge is based on fraud that you committed the court will not grant the discharge.
Starting the Chapter 13 Bankruptcy – Initial Filing and Forms
To begin a chapter 13 bankruptcy, we will file a 3-page form. Along with the form, you must submit the filing fees or include a request to pay the fees in installments. The fees can be paid in installments over 4 months. The court may choose to extend this to 6 months if there is sufficient reason to do so. The fees include one fee for filing and a second fee for sending notifications. There are no waivers granted for the filing fee.
In addition to the 3-page form we will include the following forms or information:
- Your Social Security number
- A statement of your monthly income based on the last 6 months, a calculation of how long your repayment plan will be and how much disposable income you have
- Schedules (including information on your debts, any leases you have, a list of personal property you own, etc.…)
- A statement of financial affairs (providing details of financial transactions)
- A certificate from a court approved credit counseling agency stating that you completed the pre-bankruptcy briefing
- If required, any paycheck stubs or other evidence of payment from your employers that you’ve received in the last 60 days
- A statement of how much your attorney fees are
- A chapter 13 plan (which we will discuss more in depth)
- If you have education savings accounts, you include information about these
Although we will discuss the payment plan in more depth later, it is important to note that you are given a lot of flexibility in your payment plan but there are a few requirements that must be met.
Conversion to Chapter 13 from Chapter 7 Bankruptcy
If you’ve begun a chapter 7 bankruptcy, you can convert it to a chapter 13 bankruptcy at any time as long as you are eligible and have not acted in bad faith. If your income is too high or you have too much disposable income, it may be in your best interests to convert to a chapter 13 bankruptcy. It may be you want to catch up on car payments or mortgage payments. If so, chapter 13 may be a better alternative for you rather than chapter 7.
Because there are broader rules for discharging (eliminating your legal obligation to pay) your debts in chapter 13, converting from chapter 7 may be a good strategy depending on your circumstances.
All of these issues are important in planning your bankruptcy case. Because we have decades of experience handling Tucson and Phoenix, Arizona bankruptcy cases, we encourage you to consider calling our office to set up your free consultation today. Whether it is protecting as much of your property as you are legally allowed or choosing whether chapter 7 or chapter 13 is your best course of action, we can ensure that you make the right choice in your bankruptcy case.