Chapter 13

What Is a “Chapter 13” Bankruptcy?

The term “Chapter 13” refers to the Chapter of the U.S. Bankruptcy Code that describes a specific procedure in which individuals may legally obtain relief from debt obligations.

Unlike a Chapter 7 bankruptcy, which is designed to completely discharge certain debts by liquidating available assets, a Chapter 13 bankruptcy allows individuals to retain their property while restructuring their debt. The goal of a Chapter 13 procedure is to set up a payment plan with creditors that will allow the debtor to pay back all or a specified percentage of debt over a period of time, usually three to five years. If you are considering filing for bankruptcy, a Michigan Chapter 13 bankruptcy lawyer can explain your options and assess your individual situation.

When Should You Consider Filing Chapter 13?

If you are earning income, but are encountering serious difficulties meeting all of your bills due to a high debt load, a Chapter 13 filing may be an effective alternative to facing foreclosure, default, collections, wage garnishment, or other adverse actions from creditors.

Chapter 13 is also an attractive option for individuals who have difficulty meeting the means test for filing under Chapter 7, or who have a strong wish to retain certain assets that would be subject to liquidation by a bankruptcy Trustee under Chapter 7, yet are unable to meet current debt obligations with their current income stream.

Who Can File Under Chapter 13?

As with Chapter 7, a debtor must meet certain legal requirements to file under Chapter 13.

First, Chapter 13 only applies to an individual who has income. In addition, in order to qualify, unsecured debts must amount to less than $360,475; and secured debts (such as houses and automobiles in which the creditor retains an ownership interest in the purchased item) must amount to less than $1,081,400. These limits, however, are adjusted annually by the federal government based on a formula that incorporates cost-of-living increases.

An individual filing under Chapter 13 must have attended credit counseling by an approved credit counseling agency before filing the petition. Further, before filing for Chapter 13, a debtor cannot have had a bankruptcy petition recently dismissed.

While these are the basic legal requirements for determining whether Chapter 13 provides a possible remedy for your situation, you should consult a qualified bankruptcy attorney to determine if other legal requirements may apply in your situation, and to evaluate whether Chapter 13 is the appropriate procedure for you to pursue.

What Happens in a Chapter 13 Bankruptcy, and How Is it Different From Chapter 7?

The purpose of a Chapter 13 proceeding is for the debtor to formulate with a plan that will allow him or her to repay all or most of their debt.

As with a Chapter 7 proceeding, once a petition is filed with the appropriate court, an Automatic Stay goes into effect. The Automatic Stay prevents all creditors from harassing the debtor or from pursuing alternative methods of loan satisfaction, such as repossession, foreclosure, or litigation.

The court appoints an impartial bankruptcy Trustee to oversee the process. In the proceeding, the court will call a meeting of all the debtor’s creditors to set out the debtor’s financial situation and to propose a plan of repayment, which is based upon the debtor’s anticipation of continued income. In a Chapter 13 proceeding, the repayment plan may include debts that would not be subject to Chapter 7 discharge. If the court approves of the plan, the debtor must make the required payments according to the schedule set out in the plan, which the Trustee then distributes to the creditors according to the plan.

If the plan is not approved, the debtor may be forced to file under Chapter 7.

Unlike a Chapter 7 proceeding, the debts subject to restructure under Chapter 13 are not discharged at the time the plan is approved. The court continues to oversee the repayment, and the case is not dismissed until the terms of the repayment plan are met over the anticipated life of the plan. During this period, a creditor will need the approval of the court to apply for any additional credit, and current creditors are barred from pursuing alternative remedies for repayment, so long as the terms of the plan are being met.

While a Chapter 13 plan is essentially a restructuring and consolidation of debt, it is not necessarily the case that all debts must be paid in full under Chapter 13. While the court may not allow the discharge secured debts for less than the value of the secured asset, it is often the case that unsecured debts, such as credit cards, may be ultimately discharged under the plan without having been paid in full by the time the plan period is completed.

How Will a Chapter 13 Bankruptcy Affect Your Credit?

As with Chapter 7, a Chapter 13 bankruptcy will be reported on an individual’s credit report. By law, a Chapter 13 bankruptcy may remain on a credit report for 7 years following the date of filing the Chapter 13 petition.

While the circumstances surrounding a bankruptcy can clearly impact the ability of an individual to obtain credit, it is also true that default, repossession, and other events will also have that effect. By undertaking a sound and feasible repayment plan under Chapter 13, you can stop all ongoing adverse reporting and steadily begin rebuild your credit score right away, rather than wait for the inevitable “ax to fall.”

It is important to remember that bankruptcies do not always compel new creditors to deny you credit. In fact, creditors know that the law does not allow an individual to abuse the bankruptcy process by repeatedly discharging debt via bankruptcy proceedings. As a result, some creditors may be willing to extend credit to those who have recently undergone a bankruptcy, knowing that the new debt obligation will not be discharged.

Furthermore, because a Chapter 13 bankruptcy indicates that an individual has income and is undertaking a plan to meet all or most of an individual’s prior debt obligations, a creditor may look upon that more favorably than alternative reporting consequences of excessive debt, such as default.

In the end, different businesses utilize different standards in deciding whether to extend credit, and there is no way to predict with certainty how a bankruptcy will impact your future credit needs. What you should know, however, is that the consequences are not necessarily dire, especially in these times when creditors understand the financial difficulties and misfortunes that has confronted so many people in the country.

How Can You Tell if Chapter 7 Is the Right Option for You?

The bottom line in determining how you should proceed is finding out whether the advantage of obtaining the help and relief you need now is going to result in the most benefit to you in the long run. That is a decision you can make only by getting accurate and complete information about what your legal options are.

Every individual faces different financial challenges, and the laws surrounding bankruptcy under Chapter 13 can be complex and difficult to understand. If you need information and advice on what is the appropriate step to take, or you would like professional advice on whether your proposed plan is feasible and whether you have met all the legal requirements to file a bankruptcy petition under Chapter 13, call the Chapter 13 bankruptcy attorneys at the Biernat Law Group for a free, no-obligation personal consultation today at (586) 493-5377.