If you’re currently facing financial issues, it can color everything you do and can make your financial future seem bleak at best. If your financial situation seems insurmountable, help may be available in the form of a Chapter 13 bankruptcy. While bankruptcy is obviously not the answer for everyone in every financially dire situation and is a fairly drastic move, it can – in certain situations – give you the kind of financial reboot you need to move forward with renewed confidence and purpose.
While a Chapter 7 bankruptcy can discharge a considerable amount of qualifying debt (and is typically a good option for those who are facing significant debt and have fewer assets), a Chapter 13 bankruptcy is generally a better option for those who need to discharge considerable debt but have higher incomes and own valuable property they are motivated to retain.
With a Chapter 13 bankruptcy, you’ll be required to use your discretionary income to pay down your debt over the course of a period that lasts from three to five years. The best step you can take to help determine if a Chapter 13 bankruptcy is a good fit for you – and if so, how to help you obtain one – is to work closely with an experienced NYC bankruptcy attorney.
Chapter 13 Bankruptcy: It’s Not for Everyone
Not everyone who is facing financial difficulties can obtain a Chapter 13 bankruptcy – and not everyone who can obtain one should necessarily do so. A Chapter 13 bankruptcy, in other words, isn’t a one-size-fits-all answer to every financial problem.
There Are Debt Limitations
In order to obtain a Chapter 13 bankruptcy, your secured and unsecured debts cannot exceed specific limitations. Your secured debts refer to those debts that allow their creditors to take the properties you purchased with the loans away if you fail to repay them. Good examples include your mortgage and car loan. Unsecured debt doesn’t extend this right or repossession, and it includes debts such as credit cards and medical bills. If your overall debt load is too high, you will likely be ineligible for a Chapter 13 bankruptcy, but a Chapter 11 bankruptcy may be an option.
You'll Need Steady Income
In order to obtain a Chapter 13 bankruptcy, you’ll need to demonstrate that you have the financial ability to meet your monthly living expenses and to make the payments outlined in the repayment plan that is confirmed by the court. If your income is inadequate or irregular, it’s unlikely that the court will approve your repayment plan.
You Are Not a Business
Chapter 13 bankruptcy is only available to individuals, but any business-related debts for which you are personally responsible can be included in your repayment plan. As such, if you're the owner of a sole proprietorship, it's possible that you can benefit from Chapter 13.
The Chapter 13 Bankruptcy Process
It is important to note at this juncture that while Chapter 7 bankruptcy is a complicated legal matter, Chapter 13 bankruptcy is far more so.
Your Mandatory Courses and Filing for Chapter 13
Before you can file for a Chapter 13 bankruptcy, you'll need to receive mandatory credit counseling education from an approved agency. This session will help evaluate whether your income is sufficient and steady enough to repay your creditors, to begin with. With your certificate of completion in hand, you can move forward with filing your official Chapter 13 bankruptcy forms with the court clerk and with paying the filing fee. Ultimately, you'll also be required to take a pre-discharge debtor education class before your Chapter 13 bankruptcy can be finalized.
Your Repayment Plan
Your Chapter 13 bankruptcy case will focus on the repayment plan that you and your bankruptcy attorney will present to the court, to the bankruptcy trustee assigned to your case, and to your creditors. Your plan must carefully consider each of your debts and must be formatted according to the type of plan form that is required by the court in question. During this portion of your case, your creditors and the bankruptcy trustee assigned to your case can raise objections to your repayment plan. If you are, however, able to hammer out a payment plan that all involved are willing to sign off on, it’s very likely that the court will ultimately approve your plan at the confirmation hearing. It’s important to note, however, that your proposed monthly payments will come due the month after you file, which can mean that you will need to begin making payments before your plan is confirmed by the court.
Confirming Your Repayment Plan
In a Chapter 13 bankruptcy, your nonexempt assets will not be liquidated to distribute among your creditors the way they would be in a Chapter 7 bankruptcy. Instead, you will be required to develop a repayment plan in which you repay your debt over time, and your plan will likely allow you to ultimately pay less than you originally owed the debtors in question. Before this repayment plan can be initiated, however, the bankruptcy court must confirm it at a confirmation hearing. If no objections are forthcoming at this confirmation hearing (your creditors were already allowed the opportunity to object during the initial presentation of your repayment plan), the court will confirm your plan – as long as all of the following elements are satisfied:
- Your repayment plan is doable under the circumstances involved, which means that you have steady income that is adequate to repay your creditors as detailed in your plan.
- You proposed the repayment plan in question in good faith, which means that you aren’t attempting to manipulate the legal process to your own advantage and to your creditors’ disadvantage.
- Your repayment plan complies with all applicable bankruptcy laws.
Once your repayment plan is confirmed, it establishes a new contract between you and your creditors. Your Chapter 13 bankruptcy case won't be finalized until you've completed your repayment plan (which will last from three to five years). At this time, any debts remaining therein will be wiped clean. While it's not impossible to successfully represent yourself in a Chapter 13 bankruptcy case, courts encourage filers to retain experienced counsel, and it is in your best financial interest to do so.
The Debts Included
There is a wide range of debt that can be addressed in your Chapter 13 case.
Your Priority Debt
Priority debts refer to those debts that must be paid in full. Examples include arrearages in both child support and spousal support (alimony) and the majority of tax obligations.
Your Secured Debt
Secured debts refer to debts for which the creditors can repossess the properties that you purchased with the loans they provided. Prime examples include your mortgage and car loan. If your goal is to keep the property in question, such as your car and your home, you’ll need to continue making your regular payments on them. If you're behind on these payments, you might be able to include your arrearages in your repayment plan.
Your Unsecured Debt
Unsecured debt refers to debt that isn’t associated with a specific purchase that can be repossessed. Examples include the balances on your credit cards and unpaid medical bills. Your repayment plan must apply all of your disposable income (that doesn’t go toward your regular living expenses and that isn’t earmarked for your priority and secured debts) toward repaying unsecured debts. While you must demonstrate that all of your remaining disposable income will be applied to these unsecured debts, you aren’t ultimately required to pay them back in full (or even to pay on them at all, in some instances).
The Value of Your Nonexempt Property
If you can afford to do so, you are permitted to retain all of your property in a Chapter 13 bankruptcy. Any value, however, that you can’t protect with an exemption (that legally exempts the specific amount from being taken in a bankruptcy) will need to be repaid.
The Length of Your Repayment Plan
Most filers opt for a five-year repayment plan, which makes the plan more financially sustainable. While a three-year plan is available to those Chapter 13 filers who are eligible to file for Chapter 7 (to save a car and/or house, for example), it generally isn’t a great option (because it puts an even heftier monthly financial burden on them). Because five-year plans are more financially feasible, they increase the likelihood that the repayment plan will be accepted by the court in the first place.
If You’re Unable to Make Your Payments
Over the course of your five-year repayment plan, there are no guarantees that you won’t experience a financial hardship that makes keeping up with your payments extremely difficult. If you experience a significant decrease in your income, you may be able to modify the payment amounts you’re making to your unsecured creditors who are included in your repayment plan. If, however, you cannot make your payments due to an unforeseen hardship, the court may allow you to discharge the debts included in your Chapter 13 bankruptcy completely. Examples of hardship that reach this magnitude can include experiencing a debilitating illness or injury or losing a specialized job due to a facility closure in a town that has no other employment opportunities in that field (such as factory work). If there are no other options available to you, you may be able to convert your Chapter 13 bankruptcy to a Chapter 7 bankruptcy, but you’re very likely to lose your nonexempt property in the process (which is often what prompts a Chapter 13 bankruptcy in the first place).
Tying up Loose Ends
Once you've completed your five-year repayment plan, you'll need to demonstrate to the court that you are current on all of your child support and spousal support obligations and that you have completed your pre-discharge debtor education requirement before you obtain a discharge of your debt. If you are able to meet all of the requirements set forth by the court, all of the balances remaining on your previously established dischargeable debt will be eliminated, allowing you to move toward a future that promises greater financial freedom.
Seek Professional Legal Counsel from an Experienced MN Bankruptcy Attorney
Bankruptcy is a difficult and stressful answer to an even more difficult and stressful financial situation. This is why the dedicated bankruptcy attorneys a Kain & Scott in MN are committed to making it the City’s nicest bankruptcy law firm. Let’s face it, you’ve been through a lot, and we have the experience, legal insight, and drive to help you find a legal path forward toward an improved financial situation in your future. We’re on your side, so please don’t hesitate to contact call us for more information about how we can help you today.
