What is Chapter 13
Chapter 13 refers to a U.S. bankruptcy proceeding in which the debtor undertakes a reorganization of his or her finances under the supervision and approval of the courts. When an individual, married couple or business is laden by debt, they can file for Chapter 13 bankruptcy. As part of the financial reorganization of Chapter 13, the debtor must submit and follow through with a plan to repay outstanding creditors within three to five years. In most circumstances, the repayment plan must provide a substantial payback to creditors - at least equal to what they would receive under other forms of bankruptcy - and it must, if needed, use 100% of the debtor's income for repayment.
With a chapter 13 bankruptcy, also known as a “wage earner’s plan,” individuals pay an agreed-upon monthly amount to an appointed impartial trustee, effectively consolidating debts into one monthly amount. The trustee then distributes the money to the filer’s creditors, and the debtor doesn’t have any direct contact with creditors.
BREAKING DOWN Chapter 13
Chapter 13 is sometimes the type of bankruptcy filed by debtors who want to keep their home from being foreclosed on. However, Chapter 7 is the most common form of bankruptcy, as it allows individuals to erase their existing debt and start fresh—however, oftentimes with a Chapter 7 bankruptcy, the individual filing surrenders their home in the process. Once an individual or couple files for Chapter 13, any home foreclosure proceedings are ceased. Chapter 13 bankruptcy also differs from the expensive and complicated restructuring of debts that occurs in a Chapter 11 bankruptcy. Essentially, Chapter 13 allows a debt-laden person or sole proprietorship that may make too much money to be considered for Chapter 7 bankruptcy to submit an orderly plan to the courts to pay back debts over a period of three to five years. Filing for Chapter 13 bankruptcy may also protect co-signers of the debtor’s loans from being held responsible for those loans.
For example, after Eric lost his job and his wife Nina suffered a medical crisis that left her unable to work in the same year, they fell behind on their mortgage, and were $25,000 in arrears. The bank had initiated foreclosure proceedings just as Eric received a job offer and Nina launched a small business. By filing for Chapter 13 bankruptcy, they were able to stop the foreclosure and keep their home. With their now-steady income, they are able to pay their mortgage each month, while also spreading the back payments over a five-year period.
Eligibility for Chapter 13 bankruptcy
Individual or married couples are eligible to use Chapter 13, even if the filer is self-employed, provided his or her existing unsecured debts are below $394,725, and secured debts fall under $1,184,200 through 2018. Filers must also have completed credit counseling to be considered eligible for Chapter 13.
To file for Chapter 13 bankruptcy, the debtor must compile a list of each creditor they owe money to, along with the amount of money owed; a list of any property owned; information about the debtor’s income, such as how much they make and where their income comes from; and detailed information about the debtor’s monthly expenses.