Chapter 13 bankruptcy - How to keep assets and repay debt

Unlike Chapter 7, Chapter 13 bankruptcy doesn't require you to sell off assets to pay off your debts. Instead, the court appointed trustee negotiates a repayment plan with your creditors that will allow you to repay your debts within 3-5 years. Chapter 13 is essentially a court supervised repayment plan.

You can file chapter 13 if you're in any of the following situations:

• Your debts cannot be discharged in Chapter 7.
• You have property lien exceeding the value of the collateral.
• You haven't filed taxes for years.
• You intend to pay off your dues on mortgage/car loan.
• Your total asset value exceeds the exemptions.
• Your income is high enough for filing Chapter 7.
• Most of your assets are non-exempt, and may lose them if you file chapter 7.

You qualify for Chapter 13 bankruptcy if you satisfy the following:

• Credit Counseling: You must enroll in a credit counseling course 6 months before filing Chapter 13.


• Means Test: Your gross monthly income should exceed the State Median Income of your family size. Find out more on how to check whether you qualify for Chapter 7 or 13.


• Secured and Unsecured debt: In order to qualify for Chapter 13, you must have less than $360,475 in unsecured debts and less than $1,081,400 in secured debts.


• Previous filing: You can file another Chapter 13 case 2 years after a previous Chapter 13 case has concluded and 4 years after Chapter 7 case has been discharged.

In addition to the other filing requirements for Chapter 13, you must also provide a proposed repayment plan either at the time of filing or within 15 days of filing. The proposed repayment plan should also be submitted to those creditors whose obligations will be included in the bankruptcy estate.

Your debts must be repaid according to the statutory repayment priority as given below:

1. The Bankruptcy Court: The first creditor to be repaid in a bankruptcy case is the court. This includes the filing fees and the money owed to the bankruptcy trustee for his/her services in managing the case.


2. Support obligations: These are obligations that have arisen due to a court ordered obligation, usually spousal or child support back payments.


3. Back Taxes: These are any amounts you owe to the IRS or state taxing authorities due to unpaid taxes.


4. Unsecured creditors: The last group to be paid is your unsecured creditors. In some cases you may be obligated to pay interest to your creditors due to the automatic stay.

When creditors can reject your plan
Creditors can reject your Chapter 13 Plan only if:

• The Plan materially alters the terms of the debt or requires the disposal of a lien before repayment.
• The amount offered under the repayment plan is less than the creditor would receive under Chapter 7.
• The creditors have evidence that the Chapter 13 repayment plan was not proposed in good faith.

Most of the creditor's objections to your proposed plan are resolved through negotiation between your creditors and the trustee. If the parties cannot compromise, the judge decides whose interest should control.

How much to pay in Chapter 13 plan
Most of your creditors, especially the court and any judgment debtors (like an ex-spouse), will be entitled to 100% of the amount you owe them. How much your unsecured debtors are entitled to depends on the amount of disposable income you have to put toward the plan every month and how long your plan lasts. The time it takes for you to repay all of your debts under a Chapter 13 bankruptcy plan depends on how much you can afford to pay each month.

When to start payment
You need to make the first payment to the trustee within 30 days of filing Chapter 13. Within 40-45 days of the 341 meeting with your creditors, the bankruptcy trustee and judge will confirm whether or not your plan is acceptable.

Plan modification & Hardship discharge
You can get the trustee's approval to modify the plan if you have severe hardship like a serious illness or you lose your job. However, if you're unable to complete the plan due to reasons for reasons beyond your control, and if modification isn't possible, you can request a Hardship discharge. In order to get a hardship discharge, your creditors must have received as much as they would have if you had filed for Chapter 7.

There are several pros and cons to filing for Chapter 13 are:

Pros:

• Pay back debts: You repay debts in lower payments.
• Stops legal action: You are protected from collections, judgments, foreclosure, etc.
• Retain assets: Real and personal property can be retained.
• Additional debts discharged: Debts nondischargeable in Chapter 7 can be discharged in Chapter 13. These debts include those for willful and malicious injury to property, debts due to a property settlement in divorce or separation, and those incurred to pay nondischargeable tax liabilities.
• Protect cosigner: Cosigners on credit cards, payday loans, and other consumer debts are protected under Chapter 13.
• Tax deduction: You will not have to pay taxes on debt forgiven during bankruptcy.

Cons:

• Tax Liens: You will not be able to avoid paying any tax liens during Chapter 13.
• Dismissal: If you stop making payments under Chapter 13 Plan, the court can dismiss your case or convert it into a Chapter 7 bankruptcy. Your case can also be dismissed if you don't pay post-filing obligations such as alimony, child support, or taxes. Learn about Chapter 13 dismissal.
• New credit: You cannot take out new credit and incur new debt without court approval.

Chapter 13 bankruptcy helps you restructure your debt payments and become current on your debts. Chapter 13 has less of an impact on your credit score than Chapter 7. However, prior to filing, make sure it is the only way you can get rid of your debts.