Chapter 13 Bankruptcy: Breaking Down the Basics

Chapter 13 is a form of bankruptcy that allows you to retain most assets but repay a portion of your debts over a period of three to five years. (This is one of the reasons why it’s also called reorganization bankruptcy.) This is different from Chapter 7, where you’re excused from your debts but may have to surrender property to your trustee for distribution to your creditors.

Eligibility

If you intend to file for Chapter 13 instead of Chapter 7, you’ll need to prove to the court that you are able to honor the payment arrangements. If you don’t make enough money, or if your income is sporadic, the court may not allow you to file.

You’re also ineligible if you owe too much money. Your secured debts, which are those that allow a creditor to seize property if you default (i.e. a car or house) can’t exceed $1,149,525 and the total of all unsecured debts, such as medical bills or credit cards, can’t be more than $383,175.

The Process

Prior to filing, you must undergo credit counseling from an approved agency. Although they are allowed to charge for their services, they must counsel you for free or at a reduced rate if you can’t afford to pay.

Repayment Plan

The repayment plan describes in detail how you will pay each debt. Chapter 13 requires certain debts, known as “priority debts,” to be paid in full. These include alimony, child support, employee wages, and some tax obligations. Regular payments on secured debts, such as a mortgage, have to be maintained, and any arrears need to be repaid.

Your plan must demonstrate that any leftover disposable income will go toward settling your unsecured debts. They don’t need to be paid in full (or even at all in certain instances), but there must be proof that any remaining income is going toward their repayment.

The duration of the repayment plan depends on how much is owed and how much you earn. If your average monthly income for the six months prior to filing surpasses the median income for Florida, you’ll have to propose a five-year plan. If not, a three-year plan can be proposed, although in some instances debtors who make below-median income will have to extend their plans beyond three years to repay a sufficient number of debts.

Defaulting on a repayment plan

Some people fail to complete their Chapter 13 repayment plan due to job loss or other misfortunes. If this happens to you, your trustee may alter your plan, or the court may allow your debts to be discharged on the basis of hardship. If the court does not consent to a plan modification or provide a hardship discharge, converting to Chapter 7 remains an option.

Ending Chapter 13

After your repayment plan is complete, all dischargeable debts that remain will be wiped out. But before the court will discharge you, you must prove that you are up to date on alimony and/or child support obligations, and that you have completed the required budget counseling course.

If you have questions about any form of bankruptcy, we can help you evaluate your options. Give us a call today at (305) 227-4030!