Debt can become overwhelming, and it often piles on faster than you realize. You might have issues with your income, a disaster that strikes your household, or any other number of problems that cause financial issues for you. Maybe you are having trouble making all of your payments now, and you don’t think you can catch up at your current rate.
In those cases, it might be a good idea to start considering bankruptcy. There are a couple of options available. Those who have very little income remaining at the end of the month and who don’t have a lot of assets might want to consider Chapter 7 bankruptcy, which can help to wipe out qualifying debt. However, those who have a higher income and who want to be able to protect their property and assets will instead want to choose Chapter 13 bankruptcy. Let’s get a better look at what Chapter 13 is and what it offers.
Eligibility for Chapter 13 Bankruptcy
It’s important to keep in mind that Chapter 13 is not right for everyone. There are certain requirements that you will need to meet.
First, there are debt limits. Secured and unsecured debts can’t exceed a certain amount. If the debt is secured, the creditor has the right to take the property if you don’t pay the debt. For example, if you don’t pay for your vehicle, the creditor has the right to repossess the vehicle. The same would be true if you didn’t pay your mortgage. You would lose your home. Unsecured debts are different. These would include things like medical bills and credit cards. The creditor doesn’t have the right to take property from you in those cases. If you find that your total debt burden exceeds the limits for Chapter 13, you may still be able to file Chapter 11 bankruptcy.
One of the other requirements for filing Chapter 13 is that you have a steady income. You need to be able to prove to the court that you have enough income to afford your typical monthly payments and obligations, and that you can pay into the repayment program set up by Chapter 13. In cases where the income is too low, or if you have irregular income, the court will not approve the payment plan.
Something else to note about Chapter 13 is that it is only available for individuals. It is not something that businesses can use. However, if you have business-related debts that you are responsible for personally, they can become part of your Chapter 13 plan. Therefore, something like a sole proprietorship could still benefit from this type of bankruptcy. You will want to speak with an attorney to see if you qualify.
What Is Chapter 13 Bankruptcy?
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 three or five-year period. The time period is based upon the debtor’s current monthly income. If the debtor’s income is less than the state’s median income, then the plan will be for three years. If the debtor’s income is above the state’s median income, then the plan will be for five years.
To qualify for chapter 13 bankruptcy, the debtor must have the income to fund the plan. Additionally, the debt limits for Chapter 13 recently increased to $394,725 for unsecured debt and $1,184,200 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 remaining 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 three or five 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 month’s 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.
What Happens When You File
When you file the bankruptcy forms with the court clerk, you will have to pay a bankruptcy filing fee. Additionally, you have to provide them with a certificate showing that you went through the mandatory credit counseling from an agency that has been approved by the United States Trustee office. This needs to be done before you file.
In addition, there will be a second course that you have to take. This is a debtor education course, which you will need to complete after you have filed your case.
The cost of these courses can vary, but they are usually affordable–$25 to $35 per course.
What Types of Debts Are Repaid with Chapter 13?
When you file for Chapter 13, you will be responsible for repaying certain types of debts that are put onto the payment plan. Let’s look at a few examples of these different types of debts and what they could include.
First, there are priority debts, which are also called priority claims. This could include things that are court-ordered, such as alimony arrearages and back child support, for example. It would typically include tax obligations as well.
If you decide that you want to keep secured assets, such as your house or car, you will have to continue paying on their individual payments for the loan or mortgage. If you are behind on those payments, you will need to pay the arrears on them as part of your plan.
The Chapter 13 plan has to apply disposable income toward unsecured debts. As mentioned, these include things like your medical bills and credit card balances. Most of the time, you will not have to repay them fully. You do need to show that you are putting your disposable income toward those repayments, though, until your plan is complete.
You can keep all of your property when you choose this type of bankruptcy rather than Chapter 7. However, you need to be able to afford to do this, as you will have to pay the value of property that can’t be protected through exemptions.
Your bankruptcy attorney can help you understand what you will and won’t need to pay and how the process works from start to finish.
Why You Should Work with a Bankruptcy Attorney
When you are considering filing for bankruptcy, you should work with an attorney. By contacting an attorney before you file, they can provide you with a wealth of knowledge. They can help you understand whether Chapter 13 or Chapter 7 is the best option for you and that you are able to file. There are certain restrictions when it comes to filing, and they can make sure you are following the right path.
They can also help you to better understand whether you should file at all. For example, if your financial situation changes before filing, should you still file? Should you file sooner? Having an attorney working with you will make it easier for you to understand exactly what you have to do and when you need to do it.
Contact The Orlando Law Group Today
The Orlando Law Group offers you the benefit of its extensive bankruptcy experience. Bankruptcy is not something to be ashamed about. You can use this opportunity to get a fresh start financially. Contact The Orlando Law Group now to learn how we can help you.
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