Curious about the Chapter 13 bankruptcy process? We have answers!
Chapter 13 bankruptcy is also known as a voluntary repayment plan. By working with your creditors to create a payment plan you can actually afford, Chapter 13 bankruptcy will allow you to retain your most important assets, including your home. At the end of your three- to five-year payment plan, your remaining debt will be discharged. Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy does not have income limitations. There are certain limitations on your repayment plan though which we discuss below.
How does the Chapter 13 bankruptcy process work?
The concept of a Chapter 13 bankruptcy is simple. You design a payment plan which is typically structured over a 3-5 year period. Upon completion of your payments, you receive a Chapter 13 discharge. In most cases, you can use this payment plan to repay certain debts (such as mortgage arrears) while not paying other debts (such as credit card debt).
The Chapter 13 341 Meeting of Creditors
In a Chapter 13 bankruptcy, a Chapter 13 trustee will be appointed to review your bankruptcy petitions and schedules. About 4-6 weeks after you file your Chapter 13 bankruptcy, you will have your 341 meeting of creditors. We discuss that meeting more thoroughly in our article “what happens at my Chapter 13 341 meeting of creditors?” It’s called a “meeting of creditors”, but creditors rarely show up at the meeting. It’s normally just you, your Chapter 13 bankruptcy attorney, and the Chapter 13 trustee.
How much do I need to repay in a Chapter 13 bankruptcy?
There are a few factors that affect your Chapter 13 plan payments:
- Priority Debts
- Secured Debts
- Disposable Income
- Non-Exempt Assets
It is the combination of these factors that determine your plan payment. We work with our clients to draft a Chapter 13 plan that works for them and that suits their needs.
How do priority debts affect my Chapter 13 plan payment?
The first factor is your “priority debt”. Priority debt are things such as recent taxes and past due child support. By law, priority debts must be paid in full through your Chapter 13 plan. As a result, the higher your priority debts, the higher your plan payment.
How do secured debts affect my Chapter 13 plan payment?
The second factor is your “secured debt”. Unlike priority debt we don’t need to pay secured debts through the plan. You may want to though. The best example of this is mortgage arrears. Sometimes, people file Chapter 13 bankruptcy in order to stop a foreclosure sale and force the bank to enter into a repayment plan. If your goal was to catch up on the mortgage, you would need to pay these arrears through the plan. The higher the arrears, the higher the plan payment.
Other types of secured debt include vehicles. We have the ability in many cases to lower your effective vehicle payments by paying them through the plan. Doing this can save you quite a bit of money overall, but would increase your plan payment.
How does disposable income affect my Chapter 13 plan payment?
The third factor is your “disposable income”. When you file the Chapter 13, you must complete a Statement of Monthly Income. This form determines if you are over or under median income for a household of your size in your county. This tells us two things.
First, it tells us your “commitment period”. If you are under median income, you can file a 3 year Plan if you desire. If you are over median income, you must file a 5 year Plan.
Second it tells us whether you need to complete a second form called Calculation of Disposable Income. If you are under median, you do not need to fill out this form. You do not have to pay anything to your unsecured creditors. If you are over median, you will need to fill out this form to determine if you must pay unsecured creditors. If you have disposable income, you must pay that disposable income into the plan. This would increase your plan payment. This form does take certain expenses into account such as your mortgage and car payments.
How do non exempt assets affect my Chapter 13 plan payment?
The trustee will use this meeting to determine if you have “non-exempt assets”. Much like a Chapter 7 bankruptcy, you are allowed to keep “exempt assets” in a Chapter 13 without issue. Each state has their own laws establishing what property is considered “exempt” property. Some states, such as Pennsylvania, New Jersey, and New York, allow you to choose between state-specific exemptions and “federal bankruptcy exemptions”. Other states, such as Maryland, require you to use state-specific exemptions.
Most Chapter 13 debtors can exempt all of their property. However, if you can’t, you would have to pay any non-exempt portion to the trustee for the benefit of your unsecured creditors. This can increase your plan payment.
Can I keep my house in Chapter 13 bankruptcy?
Yes! One of the great things about Chapter 13 is that the trustee cannot sell your assets. If you have too much equity though, you may be required to pay some unsecured creditors in your Chapter 13 Plan. Most of our clients do not have too much equity in their house. The states in which we practice have sizable exemption available for equity in your house. If you would like to know about your case, just call us.
Can I keep my car in Chapter 13 bankruptcy?
Yes! One of the great things about Chapter 13 is that the trustee cannot sell your assets. So much like your house, there are no issues here. If you have too much equity though, you may be required to pay some unsecured creditors in your Chapter 13 Plan. The good news though is most cars don’t have equity. Cars depreciate so quickly that many are upside-down. This presents us with money saving opportunities in a Chapter 13!
Can I keep my retirement account in Chapter 7 bankruptcy?
Yes! Retirement accounts are exempt under federal law. However, if you wanted to use your retirement account to fund a Chapter 13 plan, you can. You may wish to do this if you’re trying to save your house, for example. If it was too expensive to keep, you may be able to use a retirement plan to partially pay your mortgage arrears.
What happens after the 341 meeting of creditors?
The trustee will set a date for a “confirmation hearing”. This is the hearing in which the judge will determine if your plan meets the requirements of Chapter 13. We call it a hearing, but in most cases, you don’t need to go to court. We know ahead of time if the plan meets the requirements of Chapter 13. If it doesn’t, we just amend your plan!
Plan confirmation serves as a formal approval of your plan. It locks it in stone so-to-speak. This is a big milestone in Chapter 13 because you normally get certain privileges back when your plan is confirmed. You can start rebuilding your credit, for example. It also makes it easier to get a new car.
You will also need to take a second credit counseling course called a “Debtor Education Course” or “Financial Management Course”. You must file the certificate of completion to receive your Chapter 13 discharge. We have more on that in our article “what happens after I file a Chapter 13 bankruptcy petition?”
Can my Chapter 13 bankruptcy be denied?
Not in the way people may think, but it is possible that you are not eligible for Chapter 13 or that you are not eligible for a Chapter 13 discharge.
Do I qualify for Chapter 13?
Chapter 13 has a “debt ceiling”. There is a maximum amount of debt that you can have in order to qualify for Chapter 13. It’s very high though so we don’t see people hit it that often. As of April 2019, the adjusted debt limits to qualify for Chapter 13 are: $419,275 for a debtor’s noncontingent, liquidated unsecured debts. $1,257,850 for a debtor’s noncontingent, liquidated secured debts. But even if you hit the ceiling, that doesn’t mean your bankruptcy will be denied. It just means Chapter 13 is the wrong chapter. You may be better served by Chapter 7 bankruptcy or Chapter 11 bankruptcy. Those chapters do not have a debt ceiling.
You may also not qualify for a discharge if you filed a Chapter 7 case within four years of filing a Chapter 13 bankruptcy. That’s not to say you can’t be in Chapter 13, in just means you won’t get a discharge. Sometimes, you want to be in Chapter 13 bankruptcy simply to repay debts such as mortgage arrears.
It is also possible that certain debts can be excepted from discharge. This happens with student loans frequently, for instance.
Your Chapter 13 bankruptcy attorney can explain to you well in advance if you will have issues with your Chapter 13 or your Chapter 13 plan. It would be rare that we would be surprised by an issue.
What if my Chapter 13 is dismissed? Do I get a discharge?
No, unfortunately if your case is dismissed, you do not get a discharge.
One of the ways this occurs is if your plan cannot be confirmed. Chapter 13 plans have requirements. If you are not able to file a plan that meets the requirements, your plan cannot be confirmed. In such a case, the trustee will ask for your case to be dismissed. If your case is dismissed, you do not get a discharge.
The most frequent issue we see in Chapter 13 though is non-payment. You are required to make your Chapter 13 plan payments. If you don’t the trustee can ask for your case to be dismissed. If your case is dismissed, you do not get a discharge.
How long is the Chapter 13 bankruptcy process?
Your 341 meeting of creditors is about 3-4 weeks after we file your petition. Plan payments commence the first month after we file. The court sets your confirmation hearing about a month after your 341 meeting of creditors. More often than not, your plan is not confirmed at the first hearing. A typical Chapter 13 plan is confirmed about 4-6 months after we file the petition. Certain bankruptcy districts are quicker than others so the timeline may depend upon what bankruptcy district you’re in.
You cannot receive a Chapter 13 discharge until your plan payments are completed. This typically happens 3 to 5 years after you file the petition, depending on the plan you filed. After you make all of your plan payments, there is a closing process that takes a few months. You are “in bankruptcy” during the entire duration you’re paying on your plan.
That’s ok though. You can start rebuilding your credit immediately after your Chapter 13 plan is confirmed.
So the Chapter 13 bankruptcy process takes about 6 months for plan confirmation and 3-5 years for Chapter 13 discharge.
Can I change to Chapter 7 if I started as Chapter 13?
Generally, you can convert from a Chapter 13 bankruptcy to a Chapter 7 bankruptcy. You would need to be careful though. If you have non-exempt assets, the Chapter 7 trustee can sell them even though the Chapter 13 trustee could not.