Chapter 13 Bankruptcy

Bankruptcy is a legal procedure that allows individuals to discharge debts when they have become insurmountably high, thereby providing those deep in debt with the opportunity of a fresh financial start. Prior to filing for bankruptcy, the individual makes a comprehensive list of all debts, assets, income and expenses.

This is the most important and time consuming aspect of filing for bankruptcy, but it helps everyone involved (including the judge, trustee, and petitioner) to gain a clear and complete understanding of the petitioner’s financial situation. Additionally, within 180 days prior to any filing, petitioners are required to undergo credit counseling through a Federally approved counseling agency.

This counseling takes fewer than two hours to complete over the phone or online and is done to ensure that all possible alternatives to bankruptcy (such as debt consolidation and debt settlement) have been sufficiently explored.

Who Files for Chapter 13 Bankruptcy Protection?

Chapter 13 is typically filed by individual debtors who possess an income higher than the median level of the state in which they reside. When filing, the petitioner provides specifics as to his average income over the previous six months. If this income is above the median, then the filer must fill out a form detailing monthly income and expenses to determine whether he has the means to pay off some of the debt within three to five years.

If the means test indicates that the debtor can do so, then he may file under Chapter 13 bankruptcy protection. Significantly, one of the primary benefits of Chapter 13 bankruptcy protection is that it allows the debtor to devise a settlement plan that includes ongoing mortgage payments, thereby avoiding the foreclosure process while still allowing for the eventual elimination of unsecured debts.

Following a mandatory credit counseling session, the debtor files a Chapter 13 bankruptcy petition with a federal bankruptcy court in the debtor’s district. This initiates an automatic stay that inhibits creditors and collection agencies from continuing to contact the debtor. Meantime, a court appointed trustee oversees and manages the entire process while maintaining contact with the petitioner. All financial information disclosed in the required schedules and statements of financial affairs must be fully truthful and is signed under penalty of perjury. The petitioner also must provide proof that federal and state tax returns have been filed for the previous four years.

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Events Leading to Discharge of Debts Under Chapter 13

Chapter 13 bankruptcy protection involves designing a three- to five-year repayment plan that necessitates paying off some creditors in order to have other debts forgiven. After formulating the repayment plan, the debtor must attend a creditor’s meeting in which any creditors present will have the opportunity to voice their objection to the plan.

Any issues that arise out of this meeting can be raised at an ensuing confirmation hearing, where the debtor will present the repayment plan before the judge. If the plan is approved, the debtor makes payments to the trustee, who then allocates funds to creditors according to terms laid out in the repayment plan. If the plan is not approved, the debtor can amend the plan and present it in front of the judge again at another confirmation hearing. Once approved, the debtor becomes eligible for debts to be discharged, but only after the repayment plan is fulfilled.

Importantly, repayment plans must be honored in full. It is the responsibility of the petitioner to make all payments in a timely manner, as late payments are not permissible and can result in a dismissal of the bankruptcy proceedings. Accordingly, if the petitioner’s financial situation worsens while under Chapter 13 bankruptcy protection, he must notify the trustee to seek any modification to the settlement repayment schedule. Conversely, a petitioner is permitted to make accelerated payments in an effort to achieve early discharge under the agreement.

Life Following Chapter 13 Bankruptcy

The emotional relief that results from removing the stress of monstrous debt while still preserving home ownership is often worth the consequences of filing for Chapter 13 bankruptcy. However, Chapter 13 bankruptcy will remain on a credit report for seven years from the filing date. This can impede your ability to obtain new lines of credit, while potential landlords and employers may frown upon this aspect of your financial history.

However, with careful planning and responsible repayment under Chapter 13 Bankruptcy protection, it is possible to secure a small unsecured credit line and work toward rebuilding a healthy credit score and profile. Nonetheless, before deciding whether to file for Chapter 13 bankruptcy and incurring the long-term stain of a bankruptcy discharge on your credit report, be certain to investigate alternatives such as debt consolidation and debt settlement.