How Does Chapter 13 Bankruptcy Work?

Chapter 13 can be an expensive way to file bankruptcy.

Chapter 13 can be an expensive way to file bankruptcy.

When you file bankruptcy as an individual, your two primary choices are Chapter 7 and Chapter 13. Chapter 7 is more common, but your financial situation may make Chapter 13 a more suitable option. This is particularly true if you've got a lot of valuable assets. Once you qualify for Chapter 13, you have to work through a court-approved payment plan before you can get your discharge.

Qualification

You can usually qualify for Chapter 13 bankruptcy, even if you have lots of property and earn millions of dollars per year. It might conflict with your concept of someone being broke and filing for bankruptcy. In fact, the one thing that might disqualify you from filing Chapter 13 is not earning enough income. Since Chapter 13 is also known as a "wage earner's plan," the court will likely deny your petition if you can't demonstrate an ability to pay. Having too much debt is another disqualifying factor for Chapter 13. As of 2012, if you have over $1,010,650 in secured debt, such as home and car loans, you cannot file Chapter 13. You are also ineligible if you have debt from unsecured loans, such as credit cards, in excess of $336,900.

Timetable

The timetable for a Chapter 13 bankruptcy is based on your income. If your annual income is less than your state's median income for a family of your size, you can propose a 3-year payment plan. For debtors with higher-than-median income, a 5-year plan is required.

Size of Payments

When you file your bankruptcy petition with the court, you will have to submit a proposed payment plan. The court will determine approve a payment amount based on your disposable income and the value of your non-exempt assets. Disposable income is your total income less certain allowable expenses, and non-exempt assets are those which you cannot protect using state bankruptcy exemptions. The court will usually expect you to pay the full amount of your disposable income to your creditors in Chapter 13. You must also pay a minimum amount equal to the value of your non-exempt assets, which is the amount you would have to forfeit to your creditors if you had filed Chapter 7 bankruptcy instead.

Allocation of Payments

You must pay 100 percent of certain debts if you file Chapter 13 bankruptcy, but you may be able to discharge other debts without paying them at all. Administrative claims, such as court and attorney fees, must be completely paid, as well as priority debts such as back taxes, alimony and child support payments. If you are behind on your home mortgage, car loan or other secured debts, you must pay them off in your Chapter 13 plan if you want to keep the underlying property. Unsecured debts, such as credit card debts, can be paid off anywhere from 0 percent to 100 percent, depending on the size of your court-approved payment. If there isn't any disposable income left after you make your required payments, your unsecured creditors are simply out of luck.

Discharge

As soon as you complete your payment plan, be it for 3 or 5 years, the court will issue a discharge of any remaining debts. A Chapter 13 bankruptcy will show on your credit report for 7 years after you file.

About the Author

After receiving a Bachelor of Arts in English from UCLA, John Csiszar earned a Certified Financial Planner designation and served 18 years as an investment adviser. Csiszar has served as a technical writer for various financial firms and has extensive experience writing for online publications.

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