Bankruptcy Chapter 13What you need to know if you are thinking of filing a Chapter 13 Bankruptcy.
Overview You are allowed to keep all of your property when filing a Chapter 13 Bankruptcy because you are paying your creditors. A Chapter 13 plan is most helpful in the following ways:
If your house payment is in arrears and you are about to lose your home, you can put the arrearage amount in your Chapter 13 plan and avoid foreclosure.You can keep your automobile even if your payments are not current as long as you are carrying insurance on the vehicle. Many times your attorney can arrange payments so that you only pay what the car is worth at 100 percent. The remaining balance can sometimes be paid at a lesser amount as an unsecured debt.You can make sure your child support obligations are promptly paid by putting them in your Chapter 13 plan, and you can pay child support arrearages through your Chapter 13 plan thereby avoiding problems with the Court which issued the order for child support.
Topics We Will CoverWhat is a Chapter 13 Bankruptcy?Chapter 13 vs. Chapter 7Advantages and DisadvantagesGathering PaperworkMeeting the RequirementsThe Automatic StayThe Chapter 13 TrusteeThe Meeting of CreditorsHow Will a Chapter 13 Affect My Credit?Resources
What is a Chapter 13 Bankruptcy? Under a chapter 13 bankruptcy, a debtor proposes a 3-5 year repayment plan to the creditors offering to pay off all or part of the debts from the debtor's future income. You can use Chapter 13 to prevent a house foreclosure; make up missed car or mortgage payments; pay back taxes; stop interest from accruing on your tax debt (local, Tennessee state, or federal); keep valuable non-exempt property (see Tennessee exemptions); and more. If you can stick to the terms of your repayment agreement, all your remaining dischargeable debt will be released at the end of the plan (typically three to five years). The amount to be repaid is determined by several factors including the debtor's disposable income. In addition, the total amount paid to creditors under the Chapter 13 plan must also be at least as much as creditors would have received if the debtor filed a Tennessee Chapter 7 bankruptcy. To file Chapter 13 bankruptcy you must have a "regular source of income" and have some disposable income to apply towards your Chapter 13 payment plan.
Chapter 13 vs. Chapter 7 There are several situations where a Chapter 13 is preferable to a Chapter 7. A Chapter 13 bankruptcy is the only choice if you are behind on your mortgage or business payments and you want to keep your property, either in Tennessee or another state, at the end of the bankruptcy process. A chapter 13 bankruptcy allows you to make up their overdue payments over time and to reinstate the original mortgage agreement. In general, if you have valuable property not covered by your Tennessee bankruptcy exemptions that you want to keep, a chapter 13 filing may be a better option. Also, people file Chapter 13 bankruptcy because they have too much income to file a Chapter 7 bankruptcy or have the kind of debt that is non- dischargeable in a Chapter 7 (e.g. certain taxes).
Advantages to a Chapter 13 Repayment PlanIf you choose and you can afford the payment plan, you can keep all your property, exempt and non-exempt. While debts are not canceled as in a Chapter 7 discharge they can be reduced under a Chapter 13 payment plan. You have immediate protection against creditor's collection efforts and wage garnishment. More debts are considered to be dischargeable (including debt you incurred on the basis of fraud and credit card charges for luxury items of $1,150 or more made within 60 days of filing). If the Chapter 13 plan provides for full payment, any co-signers are immune from the creditors efforts. Continued on Next Page
Advantages to a Chapter 13 Repayment PlanYou have protection against foreclosure on your home by your lender as long as you meet the terms of the plan. You have more time to pay debts that can't be discharged by either chapter (like taxes or back child support). You can file a Chapter 13 at any time. You can file repeatedly. You can separate your creditors by class where different classes of creditors receive different percentages of payment. This enables you to treat debts where there is a co-debtor involved on a different basis than debts incurred on your own.
Disadvantages to a Chapter 13 Repayment PlanYou create a payment plan where you use your post bankruptcy income. This ties up your cash over the Chapter 13 plan period. Legal fees are higher since a Chapter 13 filing is more complex. Your debt must be under $1,000,000 (e.g., unsecured debts are less than $250,000 and secured debts less than $750,000). Your plan and therefore your debt will last for 3 to five years. You are involved in the bankruptcy court process for the term of the 3-5 year plan.
The Process of Filing Chapter 13Gathering Paperwork To begin the bankruptcy process you must itemize your current income sources; major financial transactions for the last two years; monthly living expenses; debts (secured and unsecured); and property (all assets and possessions, not just real estate). You should also collect your tax returns for the last two years, deeds to any real estate you own, your car(s) titles, and the documents for any loans you may have.
The Process of Filing Chapter 13Meeting the Requirements If you are filing a Chapter 13 bankruptcy, a proposed repayment plan must also be submitted. After reasonable monthly expenses have been paid, how much money will you have left over to put toward your outstanding bills? And how will this money be divvied up among those you owe? Priority claims (such as taxes and back child support) must be paid in full; unsecured debts (like credit card debt and medical bills) are usually paid in part. Depending upon the judgments of those involved with your case, unsecured debts can be paid off for as little as 10 cents on the dollar.
The Process of Filing Chapter 13Meeting the RequirementsIn addition to the general requirements listed above, the repayment plan must pass three tests: 1) It must be delivered in good faith. 2) Unsecured creditors must be paid at least as much as if a Chapter 7 bankruptcy had been filed. Generally, this is the value of all the nonexempt property you own (see Tennessee bankruptcy exemptions). 3) All disposable income must be paid into the plan for at least three years (you may use up to five years in order to meet the second test that you pay at least as much as in a Chapter 7).If you have filed Chapter 13, you must begin making your plan payments. Generally these payments will be withdrawn directly from your wages and you or your attorney should arrange with the court for these payments to be deducted from your wages.
The Process of Filing Chapter 13 The Automatic Stay Once you have filed your paperwork with the bankruptcy court, an automatic stay immediately goes into effect. This provision prevents creditors from making direct contact with you or staking a claim on any of your property from the day of filing forward. This will stop any foreclosure proceedings. If you have filed Chapter 13, you must begin making your plan payments. Generally these payments will be withdrawn directly from your wages and you or your attorney should arrange for these payments to be deducted from your wages
The Process of Filing Chapter 13The Bankruptcy Trustee Upon filing, the court will assume legal control of your debts and property not covered by your Tennessee exemptions. A trustee will be appointed to your case by the court. The job of the trustee is to see that your creditors are paid as much as possible. This person will thoroughly review your paperwork, particularly the assets you have in your possession and the exemptions you wish to claim, and can challenge any element of your case. If your proposed repayment plan complies with all the criteria for filing Chapter 13, the Chapter 13 Trustee will approve it, and the plan will be confirmed.
It is the Chapter 13 Trustees duty to make sure that your creditors receive the payment each month which has been proposed in your Chapter 13 repayment plan.
The Process of Filing Chapter 13The Meeting of Creditors Approximately a month after filing, the trustee will call a first meeting of creditors, which the debtor must attend. This proceeding is also referred to as the 341 meeting, named after the corresponding section of the bankruptcy code. Creditors rarely attend a Chapter 7 bankruptcy meeting; one or two creditors may attend a Chapter 13 meeting, especially if there is a question as to the legitimacy of some aspect of the plan. Objections are typically resolved by negotiation between the debtor or the debtor's counsel and the creditor. If a compromise can not be reached, a judge will intervene.
The meeting of creditors typically lasts about five minutes. You will receive notice of the location of the meeting but you may contact the court to confirm the address and time. (see Tennessee Bankruptcy Court Directory)
The Chapter 13 Trustee will review your proposed repayment plan which your attorney has prepared. He may ask you questions about the information you have submitted.
How your Meeting of Creditors goes depends mostly on you. Once you file your Chapter 13 petition, you must begin making payments to the Chapter 13 Trustee. If you go to Court without ever having made a payment into your plan, your case will be dismissed.
The Process of Filing Chapter 13The Meeting of Creditors
How Will A Chapter 13 Affect My Credit? There is no clear answer to this question. Unfortunately, if you are behind on your bills, your credit may already be bad. Bankruptcy will probably not make things any worse. The fact that you've filed a bankruptcy can appear on your credit record for ten years.
It is possible to purchase a new home or automobile while you are in your Chapter 13, however, you must have permission from the Bankruptcy Court to do this. This could be accomplished by having your attorney file a Motion to Incur Debt with the Court. These motions are usually granted if you have made payments into your plan on a regular basis, and the Court feels that you can afford the debt you are incurring.
ResourcesTennessee Bankruptcy LawThe Office of the Chapter 13 Trustee Henry E. Hildebrand, IIIUnited States Bankruptcy Court for the Middle District of Tennessee