Chapter 13 bankruptcy, or a wage earner's plan, allows a bankrupt individual to develop a payment plan in order to discharge all or part of their debt. Debtors under this chapter can repay their creditors over three to five years. If their monthly income is less than the state median, the plan will be over three years; if their monthly income is more than the state median, the plan will generally be for five years. Under no circumstances can the repayment plan be for more than five years. While under Chapter 13 bankruptcy, creditors are forbidden from continuing or starting any debt collection efforts.
There are three types of debt claims:
Priority claims are those granted special status by the bankruptcy law. These may be most taxes and the cost of the bankruptcy proceeding. These claims must be paid in full under the plan unless a creditor agrees to a different treatment.
Secured claims are those that allow the creditor to take back certain property owned by the debtor as collateral if the debt is not paid. If the debtor wishes to keep the collateral, the plan must provide for, at least, the value of the collateral. Unless the debt was incurred to buy the collateral, as in the case of a car loan, in which case the debt must be paid in full, as the value of the collateral may be lower due to depreciation.
Unsecured debts are those for which a creditor cannot take back certain property owned by the debtor as collateral. These debts are not generally paid in full as long as the debtor agrees to pay all projected disposable income over the commitment period and unsecured creditors receive at least as much as they would have under a chapter 7 filing.
Chapter 13 Eligibility
Any individual whose unsecured and secured debts are less than a certain amount, adjusted periodically to reflect changes in the consumer price index, is eligible for Chapter 13 relief, regardless of whether they’re self-employed or operating an unincorporated business. A partnership or a corporation is not eligible for Chapter 13 bankruptcy debt relief.
An individual will not be eligible if, during the 180 days preceding the petition, the individual had a prior bankruptcy petition dismissed due to willful failure to appear before the court, failure to comply with court orders or was voluntarily dismissed. Additionally, the individual must have received credit counseling from an approved counseling agency, either an individual or a group briefing, within 180 days prior to filing the petition. This requirement can be exempt in emergency situations if it has been determined that there are insufficient approved agencies to provide counseling. A management plan developed during the credit counseling can be filed with the court.
It’s also important to note the time requirements between bankruptcies. There must be 8 years between two Chapter 7 filings, 3 years between two Chapter 13 filings, 4 years for Chapter 7 after a Chapter 13 filing, and 6 years for Chapter 13 after a Chapter 7 filing.
A debtor under Chapter 13 relief is entitled to a discharge once all payments under the Chapter 13 plan have been completed, so long as the debtor:
Certifies that all domestic support obligations that came due prior to making such certifications have been paid (if applicable)
Has not received a discharge in a prior case filed within two years in case of a prior Chapter 13 case and four years for prior Chapter 7, 11 and 12 cases.
The credit counseling requirement is also required for Chapter 7. I also think it’s more valuable to inform people of the time requirements for prior bankruptcies (8 years between 7s, 2 years between 13s, 4 years for a 7 after a 13, and 6 years for a 13 after a 7. You included the 2 years lower down on the 13 page.) People’s own misconduct happens, but is less common.
With all those requirements met, the court will not enter the discharge until, after notice and a hearing, it has been determined that there is no reason to believe that there is any pending proceeding that might give rise to a limitation on the debtor’s homestead exemption.
Circumstances may arise that prevent a debtor under Chapter 13 from completing the debt relief plan. If this is the case, the debtor can ask the court to grant them a hardship discharge. This does not apply to any nondischargeable debts under a Chapter 7 case. Generally, a hardship discharge is available if:
Failure to complete the payment plan is due to circumstances beyond the debtor’s control and through no fault of their own.
Creditors have received at least the amount they would have received under a Chapter 7 liquidation case.
Modifying the plan is not possible. An injury or an illness that prevents employment sufficient to fund even a modified plan may serve as the basis for a hardship discharge.
How to boost credit score while in Chapter 13
Under Chapter 13, bankruptcy can stay on your credit score for up to 7 years after filing. But if you're worried about rebuilding credit while under a Chapter 13 plan, you can take certain steps to help you rebuild your credit score:
Establish a consistent payment history by opening a credit builder card or loan
If possible, ask a family member or friend to add your name to their old credit card
Ask a family member or friend to co-sign any loans you take out
Dispute any inaccuracies you find in your credit report.
Your home and Chapter 13 bankruptcy
Chapter 13 bankruptcy can help you avoid foreclosure. It allows you to repay missed mortgage payments over the life of the repayment plan, but only if your income is enough to cover both the missed payments and your current payments. It also makes your mortgage more affordable by lowering your other debts.
Think of a payment plan as the road map to a debt-free life. It lays out the length of the plan, three to five years, and how much the creditor is due. Based on the total sum of your debts, your income, and your living expenses, it restructures your debt into bimonthly or monthly payments. Once your plan is approved, and if you follow your regular payments, some or all of your debt may be discharged and your financial picture will look much brighter.
A Chapter 13 bankruptcy trustee oversees the administration of your payment plan. Some of their duties include reviewing the proposed plan for compliance with bankruptcy law, reviewing bankruptcy documents, collecting the debt payments and distributing them among the creditors, and otherwise carrying out the terms of the plan.
A discharge is a court order releasing you from any dischargeable debts. Debts that have been discharged don’t have to be paid.
Make an appointment