Chapter 13 bankruptcy is essentially a reorganization. Chapter 13 enables individuals to develop a payment plan to pay back either all or some of their debt to creditors over a 3 or 5 year period. The time period is based upon the debtor’s current monthly income. If the debtor’s income is less than the states median income, then the plan will be for 3 years. If the debtor’s income is above the states median income, then the plan will be for 5 years.
To qualify for chapter 13 bankruptcy, the debtor must have income to fund the plan. Additionally, the debt limits for a chapter 13 recently increased to $360,475 for unsecured debt and $1,081,400 for secured debt. This means that if your debt is greater than these limits, you will have to file either a Chapter 7 or a Chapter 11 bankruptcy.
If the debtor decides to keep secured property, the debtor will continue to make payments to those secured creditors. However, if the debtor does not want to keep secured property, such as a house or car, the debtor can surrender the property and the creditor will take the property back and the remainder amount owed is treated as unsecured debt. Unsecured creditors (credit cards for example) must receive at least as much as they would have received if the debtor filed a Chapter 7 bankruptcy. For example, if unsecured creditors would have received $5,000 if the debtor filed a Chapter 7 bankruptcy, then the unsecured creditors must receive at least $5,000 over the course of 3 to 5 years during the chapter 13 bankruptcy.
When preparing the chapter 13 schedules to file with the petition, the debtor must list all income, debt, personal property, and monthly expenditures. The amount of the plan payment is based upon the debtor’s disposable income. For example, after the debtor lists all income and monthly expenditures (utility bill, water bill, food, clothing expenses, rent/mortgage, phone bill, etc.) whatever is left over is the debtor’s disposable income. The debtor does not list payments to secured or unsecured creditors that are paid within the plan. For example, if the debtor has $150 left over after paying all necessary expenses, then the debtor would make a payment of approximately $150 per month to the Trustee for either 3 or 5 years, depending upon the plan.
Chapter 13 bankruptcy requires a commitment from the debtor to pay monthly payments to the Trustee. The debtor has a choice of either directly paying the Trustee or having his/her employer pay the Trustee directly. The debtor has a much greater chance of completing the plan successfully if the debtor allows his/her employer to pay the Trustee. However, it’s the debtor’s responsibility to ensure his/her employer is making the payments timely. If the debtor misses a payment, the debtor must make up that payment within 21 days and pay the next months payment. If the debtor fails to make up the payment, the debtor’s case is dismissed, and the debtor does not receive a discharge. The debtor would then be liable for the entire debt.