What is a Chapter 13 Bankruptcy?
A Chapter 13 Bankruptcy is a debt adjustment repayment plan. There are several different reasons that a person may be filing a Chapter 13 and several universal requirements that must be satisfied through your proposed repayment plan. First, we will cover the main reasons why an individual might file a Chapter 13 as opposed to a Chapter 7.
- Income exceeds the house hold median limit set by each state- In most instances where household that are seeking bankruptcy fall above the median income level the bankruptcy court will determine that you have the ability to repay some, or all, of your creditors with the help of bankruptcy protection.
- Previous Chapter 7 bankruptcy was filed less than eight years ago in a case where the debt was discharged (this is six years from the date of filing for previously filed Chapter 13 cases)
- Catching up on secured debt where the filer wishes to keep the collateral (usually a primary vehicle or homestead)- your repayment plan will account for the payment of all secured arrears and give the filer protection while they work to get current
- Protection of certain assets that would be liquidated in a Chapter 7 Bankruptcy
- Payment of priority and secured State and Federal tax obligations
- Payment of property tax arrears owed on the filer’s homestead
- Payment of child support arrears
- Protection from garnishment of private student loans
- Lowering the interest rate on an auto loan
- In some cases a person may be able to cram down or strip off secured loans (this will depend on the age of the secured loan and the amount of equity you hold in the property)
A Chapter 13 repayment plan must be written to satisfy several requirements, regardless of the driving factor. A Chapter 13 plan must:
- Contain a minimum of 36 months and a maximum of 60 months of payment for filers who are below the median income level. Filers who are over the median income level must have 60 months of plan payments provided for in their proposal.
- Pay all priority debt in full over the duration of the plan. Some of the more common priority debts include:
- Arrears owed to a child support or spousal maintenance recipient
- Tax obligations incurred for the last three to four years that have come due (the number of years determined to be priority will depend on what time of the year the bankruptcy is filed)
- The balance remaining balance of any attorney’s fees and expenses owed to your bankruptcy attorney
- Payment of all secured taxes owed to the Federal or State taxing authority with interest (this includes property tax debt)
- Satisfy the Best Interest test- the creditors that would have been paid through the liquidation of assets in a Chapter 7 must receive at least the same amount over the course of the Chapter 13 repayment plan
- Satisfy the Best Efforts test- in most cases a Chapter 13 plan payment must consist of a filer’s full disposable income. This is what is left over each month after an individual pays their regular living expenses. Your attorney will help you put a budget together that accounts for incidentals and other necessary expenses.
A Chapter 13 Bankruptcy is meant to make your debt repayment more manageable by stopping the collection process, reducing or eliminating interest, and eliminating debt as would be in a Chapter 7. If a Chapter 13 is right for you it should reduce your financial pressure, allowing you to repay what you are able, and provide protection from your creditors.
Alyssa F. George