There are two types of bankruptcies that individual consumers file; Chapter 7 and Chapter 13. Chapter 7 involves liquidation of assets and completely discharging a person’s debts and thus freeing them of the obligation to pay. Chapter 13 is a little bit more complicated.
Chapter 13 bankruptcy is also referred to as a reorganization plan or an individual reorganization. This type of bankruptcy is typically filed by debtors with steady incomes that are greater than regular living expenses. It is also chosen when a debtor has valuable assets that cannot be exempted or if they owe debts that are non-dischargeable in a Chapter 7 such as child support or taxes.
Who Can File Chapter 13?
In order to qualify for Chapter 13, you must have somewhat of a reliable source of income and be able to prove to the court that you will be able to make the payments. If your income is too low, you may not be able to file a Chapter 13. Additionally, if your debt is too high you won’t qualify either. In a Chapter 13 bankruptcy, the secured debt cannot be more than $1,010,650 and unsecured debt not more than $336,900.
How Does Chapter 13 Work?
Child support and taxes are debts that are considered priority claims and usually have to be paid in full. Otherwise a payment plan is set up with the remaining debt that is owed and creditors are paid within 3 to 5 years based on priority. In a Chapter 13 bankruptcy, only a fraction of the debt is often paid and are not required to be paid in full (unless of course they are priority claims.) Debtors are allowed to keep all of their assets and are able to make payments on their debts interest free. After priority debts and secured debts such as a home or vehicle are added to the plan, any disposable income that is left will be spread out among the creditors that include credit cards and medical bills.
If you are filing a Chapter 13 bankruptcy, your payment will be based on a confirmation test which includes the Best Interests of Creditors test which calculates the non exempt value of assets and subtracts the Chapter 7 trustee’s administration costs. The Best Efforts test calculates disposable income, and the Priority Claims test are those claims that must be paid in full. The number that is the largest is the amount that you will pay over the life of the Chapter 13 bankruptcy plan. Attorneys fees are included in the repayment plan as well.
Once you have started the Chapter 13 process, you will probably need to make your first payment in 30-45 days. Most of the time the payments are made to the trustee who disburses the funds as directed in the repayment plan to the creditors. Another big difference between Chapter 7 and Chapter 13, is that in a Chapter 13 bankruptcy, you will have to ask permission to sell assets or borrow money, even from payday lenders. You are also not permitted to use any credit cards during the procedure until it is either discharged or dismissed.
As mentioned previously, your repayment plan may be as long as 3 years but cannot be more than 5 years. If you sell assets you can also apply payment to the plan and finish it faster. When the creditors have been paid according to the schedule, you will receive a discharge of debt, similar to the discharge in a Chapter 7.
Often, consumers want to choose a Chapter 13 bankruptcy because they feel it is just the right thing to do or they think that repayment will not harm their credit as much as a Chapter 7. Any sort of bankruptcy that is filed will likely remain on the credit report for at least 7 years, and thus affects your credit in the same way. If however, there is a possibility that you will not be able to make the payments that are required, it is best to attempt to file a Chapter 7 instead. If you cannot make your payments and are not allowed a modification of plan by the trustee, your bankruptcy will be dismissed without a discharge and you may end up filing a Chapter 7 anyway.
Most other aspects of the two bankruptcy filing procedures are similar. Chapter 13 bankruptcy also protects creditors from repossession and collection efforts. Both require debt and credit counseling and both require a Meeting of Creditors. The greatest similarity however is that both chapters allow you to obtain a fresh start and possibly get your finances back on track.
If you are unsure which chapter to file, you may want to speak with an attorney who will help you figure out, according to your specific situation which type of bankruptcy you qualify for and will best suit your needs.