Chapter 13 bankruptcy is designed for individuals with a regular income who can repay their debts over time. If you’re feeling overwhelmed by debt and wondering how to manage your financial obligations while keeping your assets, Chapter 13 bankruptcy might be the solution you’re looking for. In this guide, we lay out how Chapter 13 bankruptcy works, who can file, and what the benefits are.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also known as a wage earner’s plan, allows individuals with regular income to develop a plan to repay all or part of their debts. Under this bankruptcy chapter, debtors propose a repayment plan to make installments to creditors over three to five years.
Unlike Chapter 7 bankruptcy, which involves liquidating assets to pay off debts, Chapter 13 focuses on reorganizing your debt and allowing you to keep your home and your personal property.
IMPORTANT NOTE: If you have substantial equity in your home (20% or more), you may be able to avoid bankruptcy altogether by refinancing your mortgage with cash out.
If you’d like to explore this option, please reach out to Hannah Papazian at JVM Lending at hpapazian@jvmlending.com or call (855) 855-4491.
How Does Chapter 13 Bankruptcy Work?
When you file for Chapter 13 bankruptcy, you submit a repayment plan to the bankruptcy court. This plan outlines how you intend to pay off your debts over a period of three to five years.
The length of your repayment plan depends on your current monthly income compared to the state median income. If your income is less than the median, your plan will typically last three years. If it’s more, the plan will usually extend to five years.
One of the key features of Chapter 13 bankruptcy is the automatic stay, which immediately stops most collection efforts from creditors once you file your petition. This means no more harassing phone calls, wage garnishments, or foreclosure proceedings.
Who Can Declare Chapter 13 Bankruptcy?
To be eligible for Chapter 13 bankruptcy, you must be an individual (not a business) with regular income and have unsecured debts of less than $2,750,000 and secured debts of less than $2,750,000. Additionally, you cannot file if a previous bankruptcy petition was dismissed in the last 180 days due to your failure to appear in court or comply with court orders.
You must also complete credit counseling from an approved agency within 180 days before filing your bankruptcy petition. This step ensures that you understand your options and the consequences of filing for bankruptcy.
How Do You File Chapter 13 Bankruptcy?
Filing for Chapter 13 bankruptcy involves several steps:
- Credit Counseling: Complete a credit counseling course from an approved agency.
- Filing the Petition: Submit your bankruptcy petition and repayment plan to the bankruptcy court in your district. This includes detailed financial statements and a proposed plan for repaying your debts.
- Meeting of Creditors: Attend a meeting with the bankruptcy trustee and your creditors. During this meeting, you’ll answer questions about your financial situation and repayment plan.
- Confirmation Hearing: The court will hold a hearing to confirm your repayment plan. Creditors can object to the plan, but the court will make the final decision.
- Making Payments: Begin making payments according to your repayment plan. These payments will be distributed to your creditors by the bankruptcy trustee.
How Long Does It Take to File Bankruptcy Chapter 13?
The process to file for Chapter 13 bankruptcy typically takes a few months from the initial filing to the confirmation of your repayment plan. During this time, you will need to gather financial documents, attend credit counseling, and participate in meetings with the bankruptcy trustee and creditors.
What Debts Are Included in Chapter 13 Bankruptcy?
Chapter 13 bankruptcy can help you manage various types of debt, but not all debts are treated equally. Here’s a breakdown of what can and cannot be discharged:
Debts That CAN Be Discharged:
- Credit Card Debt: Unsecured credit card balances can be included in your repayment plan and discharged at the end.
- Medical Bills: Outstanding medical bills can be addressed through your repayment plan.
- Personal Loans: These can be included and potentially discharged.
- Utility Bills: Past-due utility bills can be managed under Chapter 13.
Debts That CANNOT Be Discharged:
- Alimony and Child Support: These obligations must be paid in full and cannot be discharged.
- Certain Taxes: Some tax debts are non-dischargeable.
- Student Loans: Generally, student loans cannot be discharged unless you can prove undue hardship.
- Criminal Fines and Restitution: Debts related to criminal penalties must be paid in full.
Advantages of Chapter 13
Chapter 13 bankruptcy offers several benefits over other forms of debt relief:
- Keep Your Property: You can keep your home, car, and other assets as long as you adhere to your repayment plan.
- Avoid Foreclosure: Filing for Chapter 13 can stop foreclosure proceedings and allow you to catch up on missed mortgage payments.
- Manage Secured Debts: Chapter 13 allows you to restructure secured debts (other than your primary residence mortgage) and extend payments over the plan’s life.
- Protect Co-Signers: Chapter 13 has provisions to protect co-signers on consumer debts.
- Consolidation of Debts: Your monthly payments are consolidated into one payment to the bankruptcy trustee, who then distributes the funds to creditors.
- Less Severe Impact On Credit: Creditors view Chapter 13 bankruptcies more favorably than Chapter 7 bankruptcies.
Alternatives to Chapter 13
Before deciding on Chapter 13 bankruptcy, consider these alternatives:
Debt Consolidation
Debt consolidation involves taking out a single loan to pay off multiple debts. This simplifies your payments and can lower your interest rate. However, it’s crucial to ensure you can manage the new loan’s terms.
Cash Out Mortgage
If you have substantial equity in your home and a job, consider a cash out mortgage to pay off all of your consumer debts. This approach can lower your overall interest rate and considerably reduce your monthly outlays. Some mortgage programs are quite flexible, too, when it comes to credit, so don’t be discouraged if your credit scores are low.
Debt Settlement
Debt settlement companies negotiate with creditors to reduce the total amount you owe. This option can be helpful if you’re struggling with payments, but it can negatively impact your credit score and may involve fees.
Exploring these options can help you find the best solution for your financial situation. Each has its pros and cons, so evaluate them carefully and consider professional advice.
Choosing a Chapter 13 Bankruptcy Lawyer
Choosing the right lawyer is crucial for navigating the complexities of Chapter 13 bankruptcy. Here are some tips for finding a qualified Chapter 13 bankruptcy lawyer:
- Experience: Look for a lawyer who specializes in bankruptcy law and has significant experience with Chapter 13 cases.
- Reputation: Check online reviews and ask for referrals from friends or family.
- Initial Consultation: Most bankruptcy lawyers offer a free initial consultation. Use this opportunity to ask questions and assess if the lawyer is a good fit for you.
- Fee Structure: Understand the lawyer’s fee structure and ensure it aligns with your budget.
If you’d like a referral to a bankruptcy lawyer, please don’t hesitate to reach out to us. We have built a network of vetted bankruptcy lawyers across the U.S. who can provide the expert guidance you need.
Frequently Asked Questions
How does Chapter 13 bankruptcy affect your credit?
Filing for Chapter 13 bankruptcy will impact your credit score, and the bankruptcy will remain on your credit report for up to seven years from the date of filing. However, because Chapter 13 involves repaying your debts, it can be viewed more favorably than Chapter 7, which involves liquidation of assets. Over time, as you make timely payments according to your repayment plan, you can start rebuilding your credit.
How long do Chapter 13 bankruptcies last?
The duration of your Chapter 13 bankruptcy depends on your income. If your income is below the state median, your repayment plan will last three years. If it’s above the median, the plan will extend to five years. It’s important to adhere to the plan’s schedule to ensure that your debts are discharged at the end of the repayment period.
Can you pay off a Chapter 13 bankruptcy early?
Yes, it is possible to pay off your Chapter 13 bankruptcy early. If you come into a significant sum of money, such as through an inheritance or a bonus, you can use it to pay off your debts and complete your plan ahead of schedule. However, you must get the court’s approval to modify your repayment plan.
How long do I need to wait to get a mortgage after I file for Chapter 13?
You can get a mortgage while you are IN Chapter 13, but not until one year after you have filed and made at least twelve timely payments to the bankruptcy trustee. Once your Chapter 13 bankruptcy has been discharged, you will need to wait a full year from the date of discharge to obtain an FHA mortgage.
What is the difference between Chapter 7 and Chapter 13 bankruptcy?
While both Chapter 7 and Chapter 13 bankruptcy provide debt relief, they operate differently:
- Chapter 7 Bankruptcy: Also known as liquidation bankruptcy, Chapter 7 involves selling your non-exempt assets to pay off as much debt as possible. The remaining dischargeable debt is wiped out, usually within a few months.
- Chapter 13 Bankruptcy: This is a reorganization bankruptcy that allows you to keep your property and pay back your debts over time through a repayment plan. It is typically for individuals with a regular income who can afford to make monthly payments.
The Bottom Line
Bankruptcy can offer tremendous relief from the pressures of excess debt. Bankruptcy also comes with tremendous repercussions that can last for years. At JVM Lending, we specialize in the helping borrowers avoid bankruptcy with cash out refinances. If you have substantial equity in your property and are considering bankruptcy, it might not be too late to refinance and avoid bankruptcy altogether.
If you would like to see if you are eligible for a cash out refinance, please reach out to JVM Lending for assistance.
