Chapter 13 Bankruptcy is one of the most common personal bankruptcy types for individuals. It allows you to keep your property and pay part or all your debts over time -typically 3 to 5 years-, with the exact repayment period depending on the size of income and debts. It’s sometimes referred to as reorganization bankruptcy or wage earner’s plan. Here’s a close look at how this type of bankruptcy works, the eligibility, and pros & cons.
How does Chapter 13 bankruptcy work?
Before filing for bankruptcy, you are expected to receive counseling from one of the agencies approved by the Trustee’s office for credit counseling. These agencies are typically allowed to charge rates for the services but, in case you can’t afford to pay, should provide counseling either for free or at lower rates.
You will then file a petition with the court serving the state or area where you reside. Unless the bankruptcy court orders otherwise, you must also file the following:
- A schedule of income & expenditures
- Schedules of assets & liabilities
- A schedule of all executory contracts & unexpired leases
- Statement of financial affairs
- Certificate of credit counseling
You’re expected to propose a plan to clear your debts over a period of between 3 to 5 years. If your monthly income is lower than the applicable median, then the plan will be for 3 years unless the court decides to approve a longer period. On the other hand, if your monthly income is higher than the applicable median, the plan will be for 5 years. In general, filing a petition under chapter 13 will automatically stop the majority of collection actions against a debtor or his/her property.
Who is eligible for chapter 13 bankruptcy?
This type of personal bankruptcy isn’t for everyone. To successfully file for bankruptcy, you must meet the following requirements:
- Prove your ability to meet the payment obligations. You should be earning an income every month, regardless of whether you’re employed or self-employed. If your income is too low or irregular, you might not be allowed to file.
- Have low total burden – your secured debts should not be greater than $1,149,525 and your unsecured debts not more than $383,175.
- Must not be a stockbroker/commodity broker even if you want to file for your personal debts only.
- Not intentionally dismissed another case over the last 180 days.
What are the advantages of this bankruptcy type?
- One of the key advantages of chapter 13 is that it offers an individual the opportunity to save their home from foreclosure. In fact, on filling, you can stop foreclosure proceedings and may, over time, cure any delinquent mortgage payments.
- It allows you to reschedule your secured debts and repay them over the life of the repayment plan, something that can lower payments.
- The chapter also has a provision that protects your co-debtors (third parties who’re liable with you on “consumer debts”).
What are the disadvantages of this bankruptcy type?
- During the entire period, you’re obligated to commit all your disposable income (what’s left after deducting expenses) to the repayment plan. This is quite a big commitment.
- You should expect your credit to be ruined for some time – up to 10 years.
- It can make it almost impossible to secure mortgage if you don’t have one.