Chapter 13 Bankruptcy - Repayment Plan
Chapter 13 bankruptcy is very powerful. You can use it to stop a house
foreclosure,
make up the missed mortgage payments and keep the house. You can also pay off
back taxes through your Chapter 13 plan and stop interest from accruing on your
tax debt.
Filing your papers with the bankruptcy
court stops creditors in their tracks. When you file for Chapter 13
bankruptcy (or any other kind of bankruptcy), something called the automatic
stay goes into effect. It immediately stops your creditors from trying to
collect what you owe them. At least temporarily, creditors cannot legally
garnish your wages; empty your bank account; go after your car, house, or other
property; or cut off your utility service or welfare benefits.
Some people use Chapter 13 bankruptcy to buy time. For example, if you are
behind on mortgage payments and about to be foreclosed on, you can file Chapter
13 bankruptcy papers to stop collection efforts, and then attempt to sell the
house before the foreclosure. Chapter 13 bankruptcy requires discipline. For the
entire length of your case (three to five years), you will have to live under a
strict budget; the bankruptcy court will not allow you to spend money on
anything it deems nonessential. The majority of debtors never complete their
Chapter 13 repayment plans. Although most people file for Chapter 13 bankruptcy
assuming they'll complete their plan, only about 35% of all Chapter 13 debtors
do. Many drop out very early in the process, without ever submitting a feasible
repayment plan to the court. If you can come up with a realistic budget and
stick to it, however, you should have no trouble completing your Chapter 13
plan.
Payments may be deducted from your wages during your case. If you have a regular
job with regular income, the bankruptcy court will probably order that the
monthly payments under your Chapter 13 plan be automatically deducted from your
wages and sent to the bankruptcy court.
Chapter 13 bankruptcy can stay in your credit file for up to ten years from the
day you file your papers, although rarely are Chapter 13 bankruptcies reported
for more than seven years. After your case is over, however, you can take steps
to improve your credit. In fact, some Chapter 13 bankruptcy courts have
established programs to help you do just that. In such a program, if you have
paid off around 75% or more of your debts, you may attend money management
seminars and apply for credit from certain local creditors.
You Must Have Stable and Regular Income
You must have stable and regular income to be eligible for Chapter 13
bankruptcy. That doesn't mean you must earn the same amount every month. But the
income must be steady -- that is, likely to continue and it must be periodic --
weekly, monthly, quarterly, semiannual, seasonal or even annual.
You can use the following income to fund a Chapter 13 plan:
regular wages or salary
income from self-employment
wages from seasonal work
commissions from sales or other work
pension payments
Social Security benefits
disability or workers' compensation benefits
unemployment benefits, strike benefits and the like
public benefits (welfare payments)
child support or alimony you receive
royalties and rents, and
proceeds from selling property, especially if selling
property is your primary business.
You Must Have Disposable Income
For you to qualify for Chapter 13 bankruptcy, your income must be high enough so
that after you pay for your basic human needs, you are likely to have money left
over to make periodic (usually monthly) payments to the bankruptcy court for
three to five years. The total amount you must pay will depend on how much you
owe, the type of debts you have -- certain debts have to be paid in full; others
don't -- and your court's attitude. A few courts allow you to repay nothing on
debts, that legally, don't have to be repaid in full, as long as you repay 100%
of the others. Some courts push you to repay as close to 100% of your debts as
possible. Most courts fall somewhere in between.
To determine if your disposable income is high enough to fund a Chapter 13 plan,
you must create a reasonable monthly budget. If you are not proposing to repay
100% of your debts and the court, the trustee or a creditor thinks your budget
is too generous -- that is, it includes expenses other than necessities -- your
budget will be challenged.
Your Debts Must Not Be Too High
You do not qualify for Chapter 13 bankruptcy if your secured debts exceed
$807,750. A debt is secured if you stand to lose specific property if you don't
make your payments to the creditor. Home loans and car loans are the most common
examples of secured debts. But a debt might also be secured if a creditor --
such as the IRS -- has filed a lien (notice of claim) against your property.
In addition, for you to be eligible for Chapter 13 bankruptcy, your unsecured
debts cannot exceed $269,250. An unsecured debt is any debt for which you
haven't pledged collateral. The debt is not related to any particular property
you possess, and failure to repay the debt will not entitle the creditor to
repossess property. Most debts are unsecured, including bank credit card debts,
medical and legal bills, student loans, back utility bills and department store
charges.