FAQs: Chapter 13 Bankruptcy

Restructure debt and make affordable payments

Chapter 13 bankruptcy can allow you to repay your past-due and current debts over the course of three to five years. Based on the total amount of your debt and current disposable income, your attorney with the approval of your bankruptcy trustee develops a structured, affordable repayment program that your creditors must accept. Such repayment programs often allow the debtor to pay back only a portion of the debt. After successfully fulfilling the repayment program, the debtor's remaining debts are discharged with some exceptions, such as home mortgage loans.

IMPORTANT: Once you have hired an attorney, creditors are no longer legally allowed to call and harass you regarding debt.

Who are the candidates for Chapter 13 bankruptcy?

Candidates for Chapter 13 bankruptcy typically have steady incomes but have become submerged in debt and are unable to fulfill their repayment obligations. They often have assets that they do not want to lose, such as homes or vehicles. Chapter 13 bankruptcy can prevent foreclosures, repossessions, wage garnishment, lawsuits and tax collections. It can also eliminate penalties and stop compounding interest from accruing on all tax debt or a portion of it.

How much of my debt do I have to repay?

The total amount that the debtor must repay in a Chapter 13 plan is the greater of the following:

  • The individual's monthly disposable income aggregated over a certain period. Disposable income is the portion of your income that remains after subtracting monthly allowable exemptions set forth by the IRS, such as for mortgage or rent, food and transportation. More generally, it is the amount of income that is nonexempt.
  • The amount creditors would have received had the debtor's property been liquidated in a Chapter 7 bankruptcy. This amount is the value of the debtor's nonexempt assets - the value of the assets that exceed the allowable exemptions.

Once a Chapter 13 plan has been approved, the bankruptcy court issues a wage withholding order that requires the debtor's employer to deduct the court-ordered payment and send it directly to the trustee of the case. Self-employed debtors are responsible for sending the payment each month.

What is the difference between loan modification versus Chapter 13 bankruptcy?

Loan modification typically involves interest rate reductions, extension of the loan term and re-amortization of past-due amounts. With Chapter 13 bankruptcy, you are only required to repay a fraction of your debt based on your income. This agreement is legally binding, so your debtors cannot sue to recover additional monies.

What is the Chapter 13 process?

Your lawyer can file a Chapter 13 bankruptcy petition in the U.S. Bankruptcy Court. Upon being filed, an automatic stay goes into effect, which prohibits your creditors from continuing their efforts to collect debts that you have with them. During this time, you must continue with your scheduled payments, but you do not have to worry about past missed payments.

Based on the information you provide during your visit with your lawyer, your schedule, statement of financial affairs and Chapter 13 plan are prepared and filed. The schedule is a detailed listing of your assets, liabilities, income and expenses. The statement of financial affairs contains your answers to questions that are established by the bankruptcy court regarding your financial condition. The Chapter 13 plan is the repayment plan that your attorney submits to the court. It is created according to what you can afford to repay over time. Thirty days after the plan is filed, you begin making the payments that were proposed in the plan.

You then attend, with your attorney, the "meeting of creditors." This usually occurs about 60 days from the time the petition was filed. During this hearing you are asked some general questions by the court. Your attorney can instruct you as to the type of questions.

Finally, you and your attorney attend a hearing at the U.S. Bankruptcy Court to find out if your plan was accepted. Once approved, you repay your creditors according to the plan's guidelines until all remaining debt is discharged.

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.