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Chapter 13 bankruptcy is often referred to as “employee bankruptcy” or “repayment plan bankruptcy.” It is a type of bankruptcy used by individual consumers, especially those who are in financial difficulty but earn enough money to pay off a debt.

Unlike Chapter 7 bankruptcy, Chapter 13 does not eliminate most debts. But it gives borrowers a break in their collection efforts and can prevent creditors from taking your home, car or other assets. Like other types of bankruptcy, Chapter 13 gets its name from the section of the US Bankruptcy Code that describes it.

How Does Chapter 13 Bankruptcy Work?

Chapter 13 puts a beleaguered debtor on a repayment plan and offers various forms of relief. To begin with, a collection freeze begins as soon as the bankruptcy petition is filed.

This means collectors and creditors must stop calling, writing, visiting, suing, garnishing wages and otherwise trying to get their money. Chapter 13 also halts, at least temporarily, foreclosure and repossession proceedings, and it protects loan co-signers from lawsuits by creditors.

Chapter 13 is for people who are working and making enough money to pay off their debts, but need a little help. This gives them more time to make their payments and often does not have to repay the full amount of their debt.

The debtor’s payments go to a trustee, allowing Chapter 13 to act as a sort of debt consolidation plan. The process simplifies monthly payments and ends contact between creditor and debtor.

But the repayment plan itself can be complicated under Chapter 13. It must cater to three different types of creditors: priority, secured, and unsecured.

What does a Chapter 13 repayment plan look like?

Priority debts are paid first and in full. These include most tax debts.

Secured debts imply guarantees; examples include auto loans and home loans. Filers must pay secured lenders at least the value of the collateral if they wish to retain it.

Unsecured debt is debt that does not have collateral, such as credit card debt. They are paid last and may not be paid in full or at all. The bankruptcy court will look at the debtor’s disposable income to decide how much money unsecured creditors should receive.

A Chapter 13 repayment plan typically takes three or five years, depending on the debtor’s monthly income and family size. A filer earning less than the state median for similar households can typically take three years. Anyone earning more than the state median for their household size will be granted five years.

When payments are made according to the plan, any remaining debt is “paid off”. Discharged means that the debt is no longer due, even if the creditor has not received the full amount. Not all debts are dischargeable. Home mortgages, alimony, child support, certain taxes, student loans, and debts resulting from criminal activity cannot be waived.

To meet the terms of the plan, the debtor must make all payments on time and cannot incur new debts without court approval.

How to File for Chapter 13 Bankruptcy

It is possible to file for Chapter 13 bankruptcy protection “pro se”: without the help of an attorney. However, Chapter 13 is complex. It’s easy for an inexperienced pro filer to make a mistake that could result in the bankruptcy court denying the petition. This would again expose the depositor to the mercy of creditors. Collection, seizure and repossession efforts could resume.

With that in mind, a Chapter 13 registrant should follow these steps:

  1. Hire an experienced bankruptcy attorney. Someone untrained in the law will likely have a hard time determining which debts Chapter 13 can eliminate, and how or if a filer can avoid seizure or repossession. A legal expert can also help you decide if Chapter 13 is the best type of bankruptcy to file, or if you should file bankruptcy at all. Finally, a lawyer can help with the multitude of forms that need to be filled out and take the initiative to work with creditors, the trustee and the judge.
  2. Sign up for credit counseling. A course approved must be completed within 180 days before filing the documents with the bankruptcy court. Keep the certificate you get after completing the course.
  3. Gather the necessary documents. These include tax returns, pay stubs, W-2 forms, and statements for bank, brokerage, and retirement accounts. Also, ask for a current credit report. This will help you identify any creditors you owe money to.
  4. Gather the money you will need to pay court costs. The federal bankruptcy courts where all bankruptcy cases are heard charge a standard fee totaling $310 for a Chapter 13 filing, slightly less than the $338 fee to file Chapter 7.
  5. Download and complete the necessary forms. On the Bankruptcy Courts website, you will find a few dozen forms to fill out, including the application for bankruptcy and the lists or tables of assets and debts. The “100” series of forms is intended for individuals and married couples. Make single-sided prints to show in court.
  6. File your bankruptcy petition. Use the “Federal Court Locator” tool on the US Courts website to find the bankruptcy court serving your zip code. Head to the courthouse with your court fees, petition and forms. Pay the fee and submit your documents to the clerk. The clerk will give you your file number as well as the name and contact details of the syndic in charge of your file.
  7. File a plan to repay your creditors. You must do this within 14 days of filing your petition. Under your plan, you will pay regular amounts to the trustee, usually monthly or every two weeks. You must start sending this money within 30 days of filing for bankruptcy, even if the court has not yet approved your repayment plan.
  8. Attend a meeting with your creditors. Three to seven weeks after you file your bankruptcy petition, the trustee will hold a meeting of creditors. You must appear at this meeting and take an oath. Creditors can ask questions, although they usually don’t.
  9. Wait for the hearing to confirm your repayment plan. It is held in court within 45 days of the meeting of creditors and is chaired by a bankruptcy judge. Ideally, the court will approve the plan, although creditors may object that they are not getting all they are owed. If an OK is not received, you can submit an amended plan.

Once everything is approved, the debtor makes payments to the trustee, the trustee pays creditors as scheduled, and eventually the debts are settled. Before debts can be fully discharged, however, the declarant must complete a debtor education course. As with pre-bankruptcy credit counseling, the course must be offered by an approved service provider.

Finally, usually after three to five years, all debts are paid off and discharged and the deal ends.

Who can declare bankruptcy under Chapter 13?

Anyone can seek creditor protection under Chapter 13, including employees and the self-employed. Corporations and partnerships cannot use Chapter 13.

There is also a debt limit. Only people with unsecured debt under $465,275 and secured debt under approximately $1.396 million can use Chapter 13. The limits are adjusted from time to time to keep up with inflation.

How long does a Chapter 13 bankruptcy stay on your credit report?

The record of a Chapter 13 filing stays on your credit report for seven years. But the countdown starts when you file the petition, not when you complete the repayment plan.

You won’t have to do anything to have the Chapter 13 black mark removed from your credit report. The credit bureau is supposed to do this automatically.

How often can you file Chapter 13?

If you file a Chapter 13 case and find yourself deeply in debt again, you can file another Chapter 13 petition within two years of your previous filing date and hope to have your new ones set aside. debts. But if your previous bankruptcy was a Chapter 7, you’ll have to wait four years to try Chapter 13.

The deadlines only apply if you expect to pay off a debt, which means you will not have to repay it. You can file Chapter 13 more often, but you can’t expect the debt to be discharged unless you’ve waited the required time. That said, you may want to file Chapter 13 for non-discharge reasons, such as requesting a suspension of collections so you can end up in debt.

What is the difference between Chapter 7 and Chapter 13 Bankruptcy?

The big difference between a Chapter 7 liquidation bankruptcy and a Chapter 13 wage earner bankruptcy—much larger than the additional $28 fee for filing Chapter 7—is the Chapter 13 repayment plan.

Chapter 7 registrants do not have this. They agree to sell some of their assets so the money can be returned to creditors, although this rarely happens in practice. Normally the debt is written off in Chapter 7 and the creditors do not receive any money, but they can seize any collateral used to secure their loans.

In comparison, a Chapter 13 repayment plan normally repays all priority creditors in full. Secured creditors get at least as much as the value of the security. Only unsecured creditors can end up with little or nothing.

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Chapter 13 bankruptcy gives debtors with their backs against the wall some leeway. It stops collections including seizures and seizures. It will require you to pay off certain debts, usually over three to five years.

But in the end, you come out debt free and ideally able to do a better job with any future debt repayments.

Janet E. Fishburn