WHAT YOU SHOULD KNOW ABOUT CHAPTER 13 Bankruptcy
Chapter 13 Bankruptcy Protection:
Chapter 13 bankruptcy is known as wage earners bankruptcy and allows you to adjust your debts in accordance with a payment plan that last 3 to 5 years. The Chapter 13 plan requires the filer to repay all or part of their debts over 3 years if their monthly income is less than the state median income and over 5 years if you earn more per month than the state median income. In most cases you will only pay a small portion of your unsecured debt.
A significant advantage of a Chapter 13 bankruptcy is that it allows you to stop foreclosure on your home and make up any delinquent mortgage payments over the life of your plan. It may also allow you to keep your personal property and can protect co-debtors who may also be liable for your debts. A Chapter 13 bankruptcy plan can lower your payments on secured debts and may allow you to write off all or portions of your unsecured debts. The plan may also allow you to consolidate your debt resulting in one monthly payment to the trustee rather than dealing with multiple creditors. However, like Chapter 7, there are limitations on who can file for Chapter 13 bankruptcy relief.
Qualifying for Chapter 13 Bankruptcy:
- Have you received a Chapter 13 bankruptcy discharge within the last two (2) years or a discharge under Chapter 7 within the last four (4) years? If you answered yes to either of these questions you must wait to file if you would like a discharge; if no, please read below. Note that while you cannot receive a discharge if you file Chapter 13 within two years of receiving a chapter 13 discharge or four years of receiving a chapter 7 discharge, you may want to file a chapter 13 anyway to deal with liens that survived your chapter 7 bankruptcy.
- Does your secured debt exceed $1,149,525.00 or your unsecured debt exceed $383,175.00? If your secured debt (mortgage, car loan or any debt for which you put up your personal property as collateral) is greater than $1,149.525.00 or your unsecured debt (credit cards, medical bills, student loan and any debt for which no collateral was used to acquire the loan) exceeds $383,175.00 you are not eligible for chapter 13 bankruptcy. In this case you would need to consider chapter 7 or chapter 11 bankruptcy. If your debt does not exceed these limits, keep reading.
- Are you current on your income taxes? To stay in Chapter 13 bankruptcy after you have filed you must be current on your income taxes and be able to provide proof of filing an income tax return to the trustee. If you are not current on your income taxes and cannot catch up you may have to file for Chapter 7 bankruptcy protection.
- Can you keep current on any child support or alimony obligations? Outstanding child support or alimony obligations will not prevent you from filing Chapter 13 but if you cannot keep current and make required payments after you file, your Chapter 13 bankruptcy may be dismissed.
- Do you have sufficient income to satisfy the requirements of a chapter 13 plan? When you file chapter 13 you must submit a proposed plan that requires you pay your chapter 13 trustee money each month sufficient to meet the requirements of the bankruptcy code. If you do not have sufficient income to make these payments, you cannot file chapter 13. More information about the chapter 13 plan can be found below.
If you pass these tests you will be qualified to file a Chapter 13 bankruptcy.
What debts are not discharged in Chapter 13?
Like Chapter 7 bankruptcy, certain debts are also not dischargeable in chapter 13 bankruptcy. The following type of debts will not be discharged in Chapter 7:
- Secured debts such as car loan and mortgages must be kept current if you want to keep the property the lender holds as collateral. In Chapter 13 you will be able to make up any arrears or past due amounts owed but, in most cases, you will need to make your secured loan payment (i.e. your mortgage payment) in addition to any arrearage payment.
- Student loans will not be discharged absent a showing of extreme hardship.
- As a general rule income taxes will not be discharged unless 1) the taxes became due at least three years before the filing of the bankruptcy case; 2) the tax return reflecting the tax due, if required, was filed at least two years before the filing of the case, and b) the IRS sought to collect the tax more than 240 days before the bankruptcy filing.
- Child support, alimony and certain other family obligations ordered by court cannot be discharged. Unlike Chapter 7, in Chapter 13 bankruptcy you can discharge unpaid property distributions ordered by the divorce court but you can never discharge alimony or child support obligations.
- Debt for luxury goods or services incurred within 90 days of filing the bankruptcy case will not be discharged absent a showing of good faith (as a general rule it is best to not incur debt within 90 days of filing bankruptcy).
- Debts owed on cash advances obtained within 70 days of filing the bankruptcy will survive the bankruptcy discharge.
- Fines or penalties owed to a governmental unit such as criminal fines and penalties will not be discharged.
- Debts owed as a result of your causing injury or death to another while intoxicated will survive your bankruptcy.
The Chapter 13 Plan
When you file Chapter 13 bankruptcy you must propose a payment plan that adheres to the rules of bankruptcy and governs how much you will pay the trustee each month for distributions to your creditors. Your chapter 13 plan must meet the following requirements:
- If your income is greater than the median income for Florida you must propose a 5 year plan and make monthly payments to the trustee for 60 months.
- If your income is less than the state’s median income you may propose a plan that last only three years or 36 months. It is possible to propose a 5 year plan even if you earn less than the state’s median income, thereby lowering your monthly payment to the trustee.
- You must pay the following debts through your plan:
Priority Debts. All priority debts other than child support must be paid in full during the course of your bankruptcy including:
- alimony or child support;
- nondischargeable taxes;
- claim for death or personal injury the debtor caused while intoxicated (typically involving automobile accidents);
- up to $2,775 in deposits made for the purchase, lease or rental of property or services for personal, family, or household use that were not delivered or provided (this happens when you are the landlord);
- wages, salaries and commissions owed by you as an employer;
- contributions to employee benefit plans;
- money you owe to certain farmers and fishermen; and
- customs, duties, and penalties you owe to the federal, state, or local government.
Secured Debts that are due in full during the life of the plan.
Tax or other liens that are not bound by contract but remain due such as a government tax lien.
Arrearage owed on secured debt such as a car or mortgage must be paid in full during the life of the plan.
Liquidation Analysis. The liquidation analysis requires that your chapter 13 plan pay unsecured creditors at least as much as they would have received had the trustee liquidated your non-exempt assets in a chapter 7.
Trustee Fees. The trustee is entitled to a 10% fee on all funds paid through the plan which must be added to the plan. For example, if you are required to pay creditors $1,000 per month through the plan, your monthly payment to the trustee must be $1,100 to account for the 10% trustee fee.
You must relinquish all disposable income to the trustee for purposes of distribution.
If you have must have sufficient income to support your plan, chapter 13 may be a solution to your financial problems. For more information about the bankruptcy process please check out this link to our Bankruptcy Process page.
Should you have questions about bankruptcy or debt Jacksonville’s debt relief lawyer, Matthew C. Bothwell, Esq., is here to help. Please give us a call.