Chapter 13 bankruptcy - How to keep assets and repay debt

Unlike Chapter 7, Chapter 13 bankruptcy doesn't require you to sell off assets for debt payoff. Instead, you make payments under the supervision of the court.

Chapter 13 bankruptcy helps to reduce what you owe or allows for more time so that you can pay off the debt in full. It allows you to follow a payment plan (under the approval of your trustee and creditors/lenders) using which you can pay off the whole or part of your debt in 3-5 years.

You can file chapter 13 if you're in any of the following situations:

• Your debts cannot be discharged in Chapter 7.
• You have property lien exceeding value of the collateral.
• You haven't filed taxes for years.
• You intend to pay off your dues on mortgage/car loan.
• Your total asset value exceeds the exemptions.
• Your income is high enough for filing Chapter 7.
• Most of your assets are non-exempt, and may lose them if you file chapter 7.

You can qualify for Chapter 13 bankruptcy if you satisfy the following criteria.

• Credit Counseling: You should have enrolled in a credit counseling course within past 6 months before filing Chapter 13.


• Means Test: Your gross monthly income should exceed the State Median Income of your family size. Find out more from the information on Check whether you qualify for Chapter 7 or 13.


• Secured and Unsecured debt: As per Chapter 13 rules of Bankruptcy Code, you shouldn't have more than $922,975 in secured debt and $307,675 in unsecured debt.


• Previous filing: You can file Chapter 13 only 2 years after a previous Chapter 13 filing (according to Chapter 13 rules) and 4 years after Chapter 7 filing.


• Back taxes: As per Chapter 13 rules, you should have paid all taxes for the past 4 years prior to the filing. If there are back taxes, you should provide the trustee with a copy of the tax return for the period during which taxes were due. This should be done within 7 days prior to the meeting with creditors held after the filing.

It's the debtor who has to propose a payment plan and attach it along with other documents while filing bankruptcy Chapter 13. The debtor may also file Chapter 13 Plan separately but he has to do it within 15 days of the filing. He needs to send a copy of the Plan to each of his creditors for their approval.
According to Chapter 13 rules, the Payment Plan includes 3 types of debts:

1. Priority claims: These include tax debts and costs of the bankruptcy proceeding.


2. Secured debts: These are debts for which the creditor/lender can take back collateral if you don't keep paying them. Chapter 13 Plan must help you repay at least the value of the collateral. However, if you have used the loan to buy the collateral and incurred the debt within a certain time period prior to the filing, then the Plan should provide you with full payment instead of the value of collateral.


3. Unsecured debts: These include debts for which the creditor cannot take over your property. For example - credit cards, medical bills, payday loans etc.

When creditors can reject your plan
Creditors can reject your Chapter 13 Plan only if:

• The Plan does not fulfill unsecured claims worth as much as in Chapter 7.
• Your disposable income for 3-5 years isn-t enough to pay unsecured creditors.
• The Plan doesn't provide enough for the value of the collateral used in secured debt.

However, the objections can be resolved through negotiation with debtors and the trustee. In case the parties cannot compromise, the judge takes the decision.

How much to pay in Chapter 13 plan
Your payment in Chapter 13 plan depends upon certain calculations as given below.

• Liquidation Analysis: Calculate how much you could get through sale of assets excluding secured debt balance and exemptions, had you filed Chapter 7. Make sure that your unsecured creditors receive as much as they could get in Chapter7.


• Means Test calculation: This involves calculation of your average monthly income which determines how much you can pay towards the unsecured debts.


• Disposable Income Test: This includes calculation of disposable income (household monthly income minus monthly expenses other than unsecured debt payment). You may have to use the whole of your disposable income towards Chapter 13 Plan payment.


• Priority and Secured debt payment: Chapter 13 payment should be such that your priority debts are paid in full. Also, mortgage or car loan dues should be paid in full in order to get current on the loan.

When to start payment
You need to make the first payment to the trustee within 30 days of filing Chapter 13 (that is, prior to the meeting with creditors). Within 40-45 days of the meeting with creditors, the bankruptcy trustee and judge will confirm whether or not your Plan meets the standards as per Chapter 13 rules.

Plan modification & Hardship discharge
You can get the trustee's approval for plan modification only under conditions of serious illness or loss of job. However, if you're unable to complete the Plan due to reasons for which you cannot be held accountable, and if modification isn't possible, you can request for a Hardship discharge. In such a case, your creditors should have received as much as they could be paid through Chapter 7.

The pros and cons of filing Chapter 13 are given below.

Pros:

• Pay back debts: You can repay debts through lower payments.
• Stops legal action: You are protected from collections, judgments, foreclosure etc.
• Retain assets: Real and personal property can be retained.
• Additional debts discharged: Debts nondischargeable in Chapter 7 can be discharged in Chapter 13. Such debts include those for willful and malicious injury to property, debts due to property settlement in divorce or separation and those incurred to pay nondischargeable tax liability.
• Protect cosigner: Cosigners on credit cards, payday loans and other consumer debts are protected as per Chapter 13 rules.
• Tax deduction: You can get tax deduction for property taxes and mortgage interest you pay as part of Chapter 13 Plan.

Cons:

• Tax Liens: Since Chapter 13 rules require you to pay secured debt in full and tax lien is a secured debt, therefore, your payments will be higher if you have tax debt.
• Dismissal: If you stop making payments under Chapter 13 Plan, the court can dismiss your case or convert it into Chapter 7. Your case can also be dismissed if you don't pay post-filing obligations such as alimony, child support or taxes etc. Know more on Chapter 13 dismissal.
• New credit: You cannot take out new credit and incur debt without court approval.

Chapter 13 bankruptcy helps you to restructure your debt payments and get current on your loans. Unlike Chapter 7, it has a positive impact on your credit as because you’re trying to repay debts from your income. However, prior to filing make sure you’re well aware as to how it can best suit your purpose.