CHAPTER 13 BANKRUPTCY BASICS
Who is Eligible for Chapter 13 Bankruptcy
Chapter 13 bankruptcy is unique and for those who can show income that exceeds their monthly expenses. Because Chapter 13 requires you to use your income to repay some or all of your debt, you must show to the court that you are able to afford or meet your payment obligations. If your income is less than your expenses and you are in a deficit at the end of each month, or if your income is variable and unpredictable, you Chapter 13 Bankruptcy Judge may not allow you to file for Chapter 13.
Also, you cannot have a total secured and unsecured debt burden over a certain amount to be eligible. From time to time the Chapter 13 Bankruptcy laws tend to change this amount, but currently (in 2014) your total secured debts cannot exceed $1,149,525 and your unsecured debts cannot be more than $383,175. Secured debts are debts usually secured by some property, most commonly real estate, or your automobile. If you do not pay back monies owed on your secured debts, your creditor can take back the property that secured the debt. Conversely, unsecured debts such as a credit cards or medical bills do not normally give any rights to the creditor to take anything from you unless a court case is filed against you and your property is seized, or your wages garnished.
The Chapter 13 Process
In order to become eligible for filing Chapter 13 Bankruptcy, you must first receive a credit counseling course from an approved credit counseling agency approved by the United States Trustee’s office. An approved list of course can be found at: www.usdoj.gov/ust.
Each credit counseling agency may charge a fee for providing you the required counseling and providing you a certificate of completion of the course. The courses are often very simple, and take anywhere from 20-40 minutes online. The prices vary, but the most reasonable ones are about $10.00 per person, per course. If you cannot afford the counseling, these agencies must do the course for you for free or at reduced rates.
The Chapter 13 Repayment Plan Basics
The most important part of your Chapter 13 paperwork will be a repayment plan. Your repayment plan will describe in detail how much you will pay each of your debts for a period of 3 or 5 years depending on your particular case. Once the repayment period is successfully completed, the Court will discharge any unpaid unsecured debts that you may have at that time.
Often, clients tend to pay back the majority of their secured debt (such as their home and auto loans) and very little of their repayments end up going to their unsecured creditors (such as credit cards). Most Chapter 13 plans tend to outline all secured debts, priority debts (such as IRS payments), the Chapter 13 trustee fees, your scheduled attorney’s fees, if any, and the amount of unsecured debt being paid back over the repayment period.
What Will you Have to Pay to Maintain you Chapter 13 Case
You must first pay back priority debts. Priority debts are such things as IRS back taxes, child support and alimony, wages you owe to employees, and certain other tax obligations.
Also, your plan must include your regular payments on secured debts, such as your home mortgage, or an automobile loan. You must also pay back all of the back payments on any secured debts that you have not paid. These are your delinquency or arrearages with the lender. Most commonly these arrearages are on your home mortgage which accumulate over time when you do not make your monthly mortgage payments.
You Chapter 13 Plan must show all disposable income you have left after making these required payments. Any additional payments will go towards repaying your unsecured debts, such as credit cards or medical bills. Remember, you don’t have to repay these debts in full (or at all, in some cases) but you must pay back what is left over as disposable income. Often, those who are paying large amounts of priority and secured debts, will have pennies on the dollar to pay the secured creditors. After 3 or 5 years, depending on your case, the remainder of what you have not paid to these unsecured creditors will be discharged and you will not have to pay the rest of what you owe to the creditor.
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