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Chapter 13 Individual Bankruptcy

The Callan Law Firm, P.C. represents individuals throughout the Chapter 13 bankruptcy process.  Chapter 13 can help persons struggling with their debts to prevent foreclosure, cure arrearages, retain a car or otherwise keep their property, all while receiving the protections and benefits afforded by bankruptcy.  To speak with an attorney now, click here.  To learn more about the Chapter 13 bankruptcy process, read on.

Chapter 13  provides an individual the opportunity to propose a plan of financial reorganization to restructure their financial affairs while under the protection of the bankruptcy court.  The purpose of chapter 13 is to enable an individual with a regular source of income to propose a chapter 13 plan which provides for their various classes of creditors. Under chapter 13, the Bankruptcy Court has the power to approve a chapter 13 plan without the approval of creditors as long as it meets the statutory requirements under chapter 13.  Chapter 13 plans are usually three to five years in length and may not exceed five years.  Chapter 13 is in contrast to the purpose of Chapter 7, which does not provide for a plan of reorganization, but provides for the discharge of certain debts and the liquidation of non-exempt property.

A chapter 13 plan may provide for various types of debt: priority claims, secured claims, priority unsecured claims, and general unsecured claim. Chapter 13 is often used to propose a Chapter 13 Plan to cure arrearages on a mortgage, avoid “underwater” junior mortgages or other liens, pay federal taxes, and the partial payment of general unsecured debt.

Which Chapter Should I File?

An individual who is in debt can file for bankruptcy either under Chapter 7 (liquidation, or straight bankruptcy), under Chapter 13 (reorganization) or under Chapter 11 (reorganization of a company, or an individual debtor whose unsecured debt exceeds $400,000.00 and/or whose secured debt exceeds $1,200,000.00).

The debtor’s financial characteristics and the type of relief sought plays a tremendous role in the choice of chapters. In some cases the debtor simply cannot file under Chapter 13, because he or she lacks the disposable income necessary to fund a viable Chapter 13 plan (see below). Furthermore, Section 109(e) of Title 11, United States Code sets forth debt limits for individuals to be eligible to file under Chapter 13 the debt limits for filing Chapter 13 of unsecured debts of less than $383,175.00 and secured debts of less than $1,149,525.00.

Under Chapter 13, the debtor proposes a plan to pay his creditors over a 3-to-5 year period. This written plan details all of the transactions (and their durations) that will occur, and repayment according to the plan must begin within 30 to 45 days after the case has started. During this period, a debtor’s creditors cannot attempt to collect on the individual’s previously incurred debt except through the bankruptcy court. In general, the individual gets to keep his property, and his creditors end up with a reasonable payment as defined by the bankruptcy code.

Disadvantages

The disadvantage of filing for personal bankruptcy is that, under the Fair Credit Reporting Act, a record of this stays on the individual’s credit report for up to 7 years (up to 10 years for Chapter 7). But you may obtain new debt or credit (credit cards, Auto, or consumer loans) after 12-24 months, and can get a new FHA mortgage loan 24 months after discharge and Fannie Mae and Freddie Mac loan after 36 months. But during the pendency of a Chapter 13 case the debtor is not permitted to obtain additional credit without the permission of the bankruptcy court.  Moreover, creditors may not be willing to risk lending money to such an individual. However, this disadvantage is not unique to Chapter 13; it may also apply to individuals currently in a Chapter 11 or have recently been in a Chapter 7 case.

Advantages

The advantages of Chapter 13 over Chapter 7 include the ability to: stop foreclosures and cure amounts owed in order to remain in the house indefinitely; receive a a super discharge of debts which are not dischargeable under Chapter 7;  decrease or completely remove a lienholder’s secured claim in real or personal property.

Chapter 13 plan

A Chapter 13 plan is a document filed with or shortly after a debtor’s Chapter 13 bankruptcy petition.

The plan details the treatment of debts, liens, and the secured status of assets and liabilities owned or owed by the debtor in regard to his bankruptcy petition. In order for plans to take effect, it must meet a number of requirements. These are specified in § 1325 and include:

  • providing that unsecured creditors will receive at least as much through the chapter 13 plan as they would in a chapter 7 liquidation
  • either not be objected to, repay all creditors in full, or commit all of the debtor’s disposable income to the Chapter 13 plan for at least three years (or five years for a debtor who makes an above median income)

While filing for Chapter 13 bankruptcy can be a good option for many debtors, there are restrictions and limitations on who may be eligible.

Chapter 13 Bankruptcy

Businesses, even those that claim sole proprietorship status, may not file for Chapter 13 bankruptcy under the name of that business.  In the event of financial hardship, businesses are directed towards Chapter 11 to assist in reorganizing their debt.

You can, however, seek Chapter 13 bankruptcy as an individual if you are a business owner. In this way, you can include your business-related debts (those which you are personally liable for) in the process.

Secure and Sufficient Disposable Income

In order for a court to approve your Chapter 13, you will have to show the bankruptcy court that you will have enough income, after subtracting certain allowed expenses and required payments on secured debts (such as a car loan or mortgage), to meet your repayment obligations. Furthermore, certain debts, like federal income taxes, must be paid back in full for your proposed reorganization plan to be approved by the judge.

Income from the following sources may be used to fund a Chapter 13 plan:

  • ordinary wages and salary
  • seasonal wages
  • commission from sales and other work performed
  • pension
  • unemployment benefits
  • Social Security
  • welfare payment and other public benefits
  • child support
  • workers’ compensation and disability benefits
  • rent
  • royalties and
  • revenue from the sale of property

The income you use does not necessarily have to be yours ; allowances are made for married couples. A nonworking spouse may file use the money from a working spouse to file alone, and an unemployed spouse may file jointly with an employed spouse.

Your Debts Must Not Be Too High

A debt is deemed secured if the debtor stands to lose specific properties in the event that it does not make payments to its creditors. If your secured debts exceed $1,149,525 (this figure adjusts periodically for inflation), you will not be able to file for a Chapter 13 reorganization plan. Home and auto loans are the most common examples of secured debts, but a debt may be considered secured if the creditor (such as the IRS) has . But a debt might also be secured if a creditor — such as the IRS — has given notice of lien against your property.

At the same time, your unsecured debts may not exceed the amount of $383,175 (also adjusts periodically for inflation) in order to qualify for Chapter 13. An unsecured debt doesn’t afford the creditor a right to repossess a particular piece of property (credit card debts, medical or legal bills, for example).

You Must Maintain Up To Date Tax Filings

You will be called upon to submit proof of both your federal and state income tax returns for the four tax years prior to your case filing date. Additional time to become current on your filings may be granted by the bankruptcy court in the form of a postponement.  However, you must produce hard copies or transcripts of the returns for that four-year period or your Chapter 13 case will be dismissed by the bankruptcy court.

To speak with an attorney about Chapter 13 bankruptcy, contact us now.