Who Can File Chapter 13 Bankruptcy
Six Steps to Debt Consolidation
Any individual, even the self-employed or an unincorporated business-owner, is eligible for Chapter 13 relief as long as their unsecured debts are less than $383,175 and their secured debts are less than $1,149,525. Chapter 13 filers must also have received credit counseling from an approved credit counseling agency either in an individual or group briefing within 180 days before filing.
Chapter 13 debt claims fall into three categories – priority claims which refer to tax debts or those related to costs and fees from the bankruptcy proceeding; secured claims in which creditors have the right take back certain property for which they hold a lien (as in home mortgages and car loans); and unsecured debt claims in which creditors do not hold liens.
Priority claims are always paid first. In the case of a secured claim; however, debtors may keep their property providing that the value of the property has been repaid. Debtors who have used credit to purchase property, or incurred further debt within certain time frames before filing for bankruptcy, must repay the full debt.
The Six Steps of Filing Chapter 13
Step 1: Filing the Petition – A Chapter 13 case begins by filing a petition with the bankruptcy court serving the area where the debtor has residence. The debtor must also file a list of their assets and liabilities; current income and expenditures; contracts and unexpired leases; and statement of financial affairs.
The debtor must also file a certificate of credit counseling and a copy of the Debt Repayment Plan developed through credit counseling; proof of payment from employers; a statement of monthly net income and any anticipated income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. The debtor must provide the Chapter 13 case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case.
Step 2: Payment of Fees – A $235 case filing fee and a $75 miscellaneous administrative fee are paid to the clerk of the court upon filing. Additionally, the debtor must compile a list of all creditors and the amounts of their claims; the source, amount, and frequency of the debtor’s income; a list of property held; and a detailed list of the debtor’s monthly living expenses.
An impartial trustee is appointed to administer the case to evaluate and serve as a disbursing agent, collecting payments from the debtor and making distributions to creditors. Filing a petition under Chapter 13 ends (also known as “stays”) most collection attempts by creditors who are put on notice by the bankruptcy clerk. After receiving notice, creditors may not initiate or continue lawsuits, wage garnishments, or demanding phone calls.
Step 3: Meeting with Trustee and Creditors – Between 21 and 50 days after the petition is filed, the case trustee holds a meeting of creditors where the debtor is placed under oath, and both the trustee and creditors may ask questions regarding the debtor’s financial affairs and property. The debtor must file a repayment plan within 14 days after the petition is filed. Alternately, unsecured creditors must file their claims with the court within 90 days after the first meeting of creditors.
Step 4: Hearing on Repayment Plan – After the meeting, the debtor, trustee and creditors come to court for a hearing on the debtor’s repayment plan of fixed amounts, paid to the on a biweekly or monthly basis. The trustee then distributes the funds to creditors according to the terms of the plan.
If debtors pay their disposable income according to the court payment plan, they can avoid paying unsecured debts in full; however, at a minimum, this sum must equal the amount repaid if the debtor’s assets were liquidated under Chapter 7 bankruptcy. The debtor must also start making plan payments to the trustee within 30 days of filing, even if the plan has not yet been approved by the court. Disposable income does not include the amount needed for support of the debtor and family, charitable contributions up to 15% of the debtor’s gross income, or, in the case of business owners, monies needed for ordinary operating expenses.
Step 5: Confirmation Hearing – The bankruptcy judge must hold a confirmation hearing to decide whether the plan is feasible within 45 days of the creditors meeting. At this time, creditors may object to the repayment plan, the most frequent of which are that the payments are less than creditors would receive if the debtor’s assets were liquidated, or that the plan does not commit all of the debtor’s projected disposable income.
If the court confirms the plan, the Chapter 13 trustee will distribute the repayment funds. If declined, the debtor must file a modified plan, or convert the case to a Chapter 7 liquidation. If the court still does not approve the plan, or dismisses the case, the court may authorize the trustee to keep some funds for costs, and give remaining funds to the debtor.
Step 6: Final Discharge – Once the repayment plan has been paid, the debtor must undergo a financial management course, as well as another after notice and a hearing so that the court can ensure that no additional debt proceedings are pending. Upon complete, the court will discharge the debt, and creditors, whether paid in part or in full, must end all actions against the debtor.