A Chapter 7 bankruptcy is probably what most people think of when they hear the word “bankruptcy.” If one files Chapter 7 bankruptcy, one must pay one’s creditors what one can, including by liquidating any property that isn’t exempt, and then, with exceptions, one’s remaining debt is wiped out.
A Chapter 13 bankruptcy is considerably different. A Chapter 13 is a reorganization of your debt rather than a forgiveness of your debt. In effect, Chapter 13 requires you to still pay off much if not all of your debt, but it allows you to do so according to a plan that may not be consistent with your existing contractual obligations, and it allows you to hold onto most or all of the property you would lose under Chapter 7.
In order to be eligible for Chapter 13, your secured debt must not exceed a certain maximum adjusted annually (currently just over $1,000,000), and your unsecured debt must not exceed a different maximum adjusted annually (almost exactly one-third of the limit for secured debt). (Secured debts are things like mortgages and car loans, where there is some property the creditor could seize if you don’t pay.)
Assuming one’s debts do not surpass those limits, filing for Chapter 13 requires submitting a payment plan to a court. The payment plan must fulfill several conditions:
* The payment plan must last three years if one’s average income the last six months is below the median income for one’s state, and five years if it is above.
* The plan must specify the payments that will be made, when, and to which creditors.
* The plan must show that certain “priority debts” will be paid in full, including wages one owes to employees, alimony, child support, and certain tax debts.
* The plan must show that regular payments will be made to all other listed secured debts, even if they are not paid in full by the end of the three or five year period.
* The plan must show that secured creditors will be paid at least as much as they would have received under a Chapter 7 liquidation of assets.
* The plan must show that any remaining disposable income will go toward payment of all listed unsecured debts, even if they are not paid in full by the end of the three or five year period.
* The plan must establish that one is able to make reliable income projections that will enable one to meet the payments one proposes to make.
* One must have completed an approved credit counseling program before submitting one’s plan.
* One must pay a filing fee-currently $274.
The debtor then submits the payment plan to a bankruptcy court, and the court decides if it will accept it, based on how credible the income projections are and how reasonable is the amount one proposes to pay one’s creditors.
If the plan is accepted, then for as long as the specified payments are made, no listed creditor may come after the debtor, seize property, etc. If one fails to do what the plan outlines, the debts may be reinstated in full and the protection lost, or the court may modify the plan and maintain the protection if it believes unforeseeable hardship warrants doing so.
Sometimes if the debtor fails to meet the plan’s payments and the court does not modify the plan, the debtor basically files a Chapter 7 style bankruptcy after all.
During the three or five year period, one must complete an approved budget counseling program, in addition to the earlier credit counseling program. One may not, during this period, obtain any additional credit without the court’s permission.
If the three or five year period is completed successfully, all remaining listed debts are wiped out. One may also be released from the payment plan early if one pays off all the debts before the three or five year period is over.
It is important to note that like any other bankruptcy, Chapter 13 will show up on one’s credit report for ten years, and thus the negative ramifications of the bankruptcy on one’s financial well-being extend beyond the three or five years of the payment plan.
Whether a Chapter 13 bankruptcy is advisable, compared to a Chapter 7 bankruptcy or compared to muddling through without declaring bankruptcy at all, will of course vary from case to case. Anyone in a bad enough position that they are considering these options will want to consult competent legal counsel for guidance.
To fully understand the system, it is advisable to consult your bankruptcy lawyer san diego ca. With their knowledge, expertise and experience, you will certainly be able to get support. You just have to hire a reliable, professional and experienced one to make sure that you will have someone to trust and rely on.