AChapter 13 bankruptcy is referred to as a debt reorganization process or wage earner plan where you are permitted to pay your creditors over either a 3 or 5-year period. This includes your secured creditors where your payments can be extended over the life of the plan so as to decrease your monthly payments. Many unsecured creditors under this plan are paid far less than the obligations owed them. Debtors under this plan do need to have a steady source of income, which can include Social Security or disability payments.
Eligibility to File
You cannot file under this chapter if you previously filed a Chapter 7 within the past 4 years. You also must not have had a Chapter 13 dismissed within 180 days of filing this petition.
This filing is used by small business owners who wish to keep operating, by debtors who want to pay back creditors or by those facing home foreclosure. This is also an option for debtors with real property that is not their homestead, such as vacation or second homes, or other valuable personal property since these are not exempt.
To be eligible, your unsecured debt cannot exceed $383,000 and your secured debt can be no more than $1,149,525. Secured debt does include the mortgage on your homestead.
Before you can file, you must complete a debt counseling class that is approved by the US Trustee’s office. You can find a class online or our office can assist you. The class is about 60 to 90 minutes in length and has information about the process, what options there are to bankruptcy and help with drafting a budget to avoid future financial problems. The fee is about $50 but can be waived if you can demonstrate financial hardship.
With our assistance, debtors have to complete certain schedules for the petition such as assets and liabilities, monthly expenses, a financial affairs page and other disclosures about payments to creditors, property transfers and certain kinds of contracts. We explain all of this to you and assist you in preparing it. We will need proof that you filed tax returns for the past 4 years along with paystubs and other financial information before filing.
Though the trustee in a Chapter 13 bankruptcy does not seize any nonexempt property, you still have to choose one of the available California state exemptions. We can help you choose which set to choose based on what kind of property you have.
With any bankruptcy filing, an automatic stay goes into immediate effect. This prohibits creditors from continuing any court proceedings against you, including foreclosures, or undertaking collection activities such as wage garnishment, repossession or seizure of funds in bank accounts. Creditor phone calls must cease as well.
Debt Reorganization Plan
An essential element of Chapter 13 Bankruptcy is the debt reorganization plan that is generally filed with the petition though you have 15 days after filing to submit it. The plan is a payment proposal for paying back creditors over either a 3 or 5 year period. If your income is below the state median for your household size, you must use the 3-year period. Your monthly planned payments are based on whatever disposable income you have after your monthly expenses are paid. You will make one monthly payment on the same day each month. Payments may be suspended temporarily in a financial emergency. If circumstances change over the life of the plan, our office can seek to have your payments reduced.
Under the plan, you can save your home from foreclosure if you have fallen behind on payments. You can make up the arrearages over the plan’s duration but you do have to maintain the current monthly payments. Another benefit of Chapter 13 is that in most cases second mortgages can be discharged at the end of the plan, if not paid off. A motion can be filed by our office to strip off this lien if you are “underwater” or your first mortgage is more than what your home is worth.
Though you cannot discharge some unsecured debt such as student loans (unless you demonstrate extreme hardship), child support arrearages or tax debt in many cases, you can extend these payments as well and avoid some of the penalties assessed.
Your plan will be presented for approval at the Confirmation Hearing. It must be reasonable and workable. The trustee will review your expenses and budget and the percentage of the debt to be repaid. Do not acquire any new debt such as a new car loan without informing your attorneys. You will need approval from the trustee if new debt is to be incurred.
You also have to attend a meeting of creditors, scheduled about 4 to 6 weeks after you file. You meet with the trustee who will ask you routine questions about your petition and if you completed and answered all questions truthfully. This meeting is rarely attended by creditors and lasts only a few mintues
Chapter 13 Bankruptcy Discharge
Before your discharge will be issued, you do have to take and complete a debtor education or financial management class. This course can be completed online at nominal cost. If you make all your payments to the end of the 3 or 5 year period, then any remaining unsecured debts such as second mortgages, will be discharged.