What You Need To Know About Filing Chapter 13 Bankruptcy
What is Chapter 13?
Chapter 13 is a component of the US bankruptcy law that allows debtors to reorganize their financial affairs, service their debts and restore their financial standing to one of good repute, within a 3-5 year period. This class of bankruptcy filing is available only to individuals, people who are self-employed and businesses that are not incorporated. This however does not mean that all individuals automatically qualify to file for Chapter 13 bankruptcy. This arrangement allows the flexibility of debt repayment based on priority. The priority assigned is dependent on the type of debt one has incurred. There are three major classifications of debt:
These are debts which have been secured by collateral such as a house or car – some type of property. This gives the lender the guarantee that in the event of failure to repay the debt, the collateral will be handed over or taken to settle the outstanding amount. In order to retain it, the owed amount must be fully repaid. Motor vehicle and mortgage loans fall into this category.
Priority Unsecured Debt
While not secured by collateral, this type of debt must be fully repaid along with any interest accrued. They cannot be dismissed. Debts such as child support , alimony income tax and even salaries or wages owed to employees, fall into this category.
General Unsecured Debt
These debts have the lowest priority and like the priority unsecured debt, have no collateral against the debt. The difference however, is that this is a high risk situation for the creditor and as a result, the interest rates on repayment of these debts tend to be higher. Repayment does not have to made in full and the remaining balance will be discharged at the end of the agreed payment period.These debts include credit cards, back rent and medical bills with the exception of credit cards which are secured. In that case, it becomes a secured debt and will be given priority.
How To File Chapter 13 Bankruptcy
The first step is to receive credit counseling through an approved US Trustee’s Office. Inability to pay to access the service does not prevent one from acquiring counseling. In these cases, a lower rate may be charged or it may done for free, as this is a mandatory step to beginning the process.
There is however, a charge associated with the filing process, and this must be paid in order to access the requisite forms or paperwork.
Next, a payment plan will be drafted which will stipulate in detail all the terms of repayment for each debt and includes a payment schedule. This means that all secured and priorty debts will be repaid and a declaration of disposable income, ensures at least partial payment of unsecured debts.
How Long Does The Repayment Period Last?
The duration of the repayment period is determined by several factors, namely :
• The amount of debt
• The size of the household
• The debtor’s income and
• The median income of the state
If the 6 month average of your income before you filed is higher than the median, you will repay on a 5 year plan. If it falls below, you will repay on a 3 year plan. Based on individual circumstances, adjustments may be made to the schedule to ensure that a satisfactory amount has been repaid on all outstanding debts. The duration however, must not exceed 5 years.
In valid cases of inability to complete repayment, such as serious illness or loss of employment, the court may rule to make adjustments to the payment plan or altogether discharge all debts. In another scenario, where neither option is available to the debtor, one may be able to file for Chapter 7 bankruptcy, which will dismiss the Chapter 13 case. You would still however be in arrears and liable to pay any interest that was not charged while your Chapter 13 case was still open.
To close a Chapter 13 case, all the requirements of the repayment plan will have to be satisfied, then any remaining debt will be discharged. In addition, proof of up to date payment on priority unsecured debts must be provided, as well as proof of receipt of budget counseling through an approved government agency.