What is Chapter 13?
Chapter 13 bankruptcy allows private individuals to keep your property but must pay back a portion or the entirety of their debt over a 3- to 5-year period. Because the person pays most, if not all, of his or her debt, Chapter 13 is sometimes referred to as a “reorganization.”
Under another section of the bankruptcy code, Chapter 11, businesses can file for reorganization.
When an average consumer files bankruptcy, he or she normally files under Chapter 13 or Chapter 7 of the bankruptcy code. Chapter 7 cancels most debts rather than requiring a debtor to repay them. Even so, that debtor may end up having to surrender some of his or her property to a bankruptcy trustee to help his creditors recoup their losses.
Still, if the idea of canceled debt outweighs the reality of surrendered property, here are some of the other reasons that Chapter 13 can be your best avenue:
- You may be able to keep your home. Chapter 13 can allow a debtor behind on mortgage payments and facing foreclosure to catch up on payments, reinstate the mortgage and stay in the home.
- Co-signers may not held responsible legally. A section of Chapter 13 law known as the “co-debtor stay” prevents creditors from going after anyone who co-signed for you on a debt.
- Right to sell your property. Since you have made arrangements to repay your creditors, you are free to sell your property at a time when it will generate the greatest value.
- You can keep your business up and running. If you are a sole proprietor, Chapter 13 allows you to continue to do business. It is important to remember that your business must produce enough income to help you make monthly Chapter 13 payments.
- Frozen debt. All debt on unsecured claims are frozen the day you file for Chapter 13, meaning payments you make to your creditors are used to pay down debt, rather than eaten up by interest and late charges.
Chapter 13 example
A debtor must meet certain requirements to file for Chapter 13 bankruptcy protection. They include:
- You are not filing as a business entity. Corporations and limited liability companies, or LLCs, cannot file for Chapter 13. However, if you own a business as a sole proprietor or with a partner, you can file Chapter 13 based upon the debts you, and not your business, are liable for.
- Sufficient time has passed since your last filing. You cannot have discharged debt through a Chapter 13 bankruptcy within the previous two years or through a Chapter 7 bankruptcy within the past four years.
- Your debts do not exceed the limit. The debt limits for filing Chapter 13 are $394,725 in unsecured debt and $1,184,200 in secured debt. These limits are valid through 2018.
In addition, you must have gone through credit counseling. Your state and federal income tax returns have been filed for the previous four years. And, the plan proposed by your attorney repays all required debts.
These debts include child support, alimony and non-dischargeable taxes. Mortgage and auto loans must remain current during the planned repayment, and other secured debts, like tax liens, must be paid during the repayment period.
To be sure, your current income is adequate to cover payments. You must make enough money to realistically be able to keep up with your Chapter 13 repayment plan.