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- Chapter 13 Bankruptcy helps individuals sort out their debts and get a fresh start.
- Individuals filing for Chapter 13 Bankruptcy must have a steady income and no more than $2,750,000 in total debt.
- Debts are forgiven once bankruptcy proceedings are completed, but your credit score is lowered.
Even those who bring in significant income can find themselves in trouble. For those who find it difficult to keep up with their monthly payments, bankruptcy can give them a fresh start. It can even provide a means for those facing foreclosure to keep their homes.
Bankruptcy has some serious consequences, but it is an attractive option for those in need of debt forgiveness and a chance to get back on their feet.according to J. David KrekelerChapter 13 bankruptcy is the second most common form of bankruptcy in the United States, and nearly the second most common form of bankruptcy, according to Krekeler bankruptcy attorneys. 40% of bankruptcy cases in the country.
What is Chapter 13 Bankruptcy Code?
Chapter 13 is a section of the United States Bankruptcy Code entitled: Adjusting Debt for Individuals with Regular Income. “In effect, this is a discrete form of restructuring,” Krekeler said. Jonathan Carson, CEO of a bankruptcy services firm, explains that under Chapter 13, bad debtors can keep control of their assets if they have a formal repayment plan for their creditors. stret.
This form of bankruptcy is only available to individuals, not corporations. To qualify, individuals must meet two of her criteria.
- They must have some form of regular income. “Courts are generally very flexible on this point,” said Kreekeller, noting that people whose sole source of income is unemployment or Social Security have successfully filed for Chapter 13 bankruptcy. .
- Their secured and unsecured debt cannot exceed $2,750,000.
“Although it is a difficult and complicated process, filing for bankruptcy can help distressed borrowers settle their debts and give them a fresh start towards a financially sustainable future,” said Carson. .
How is Chapter 13 bankruptcy different from other forms of bankruptcy?
The three most common forms of bankruptcy are Chapter 11, Chapter 7, and Chapter 13. While Chapter 11 is primarily for corporate applications, individuals usually choose between Chapters 7 and 13.
Repayment plan: The main difference between Chapter 13 and Chapter 7 is the repayment plan, says Damon Duncan, a bankruptcy attorney and certified consumer bankruptcy expert. Duncan Law. Chapter 13 discusses income-based repayment plans. Chapter 7 does not contain a repayment plan as the assets will be liquidated and the proceeds will be used to pay creditors.
Length and Cost: The Chapter 13 process is much longer and more expensive than Chapter 7. Chapter 7 proceedings are usually completed in a few months, while Chapter 13 proceedings can take years, Duncan explains.
Length and Cost: The Chapter 13 process is much longer and more expensive than Chapter 7. Chapter 7 proceedings are usually completed in a few months, while Chapter 13 proceedings can take years, Duncan explains.
Impact on credit score: A Chapter 7 bankruptcy will remain on your credit report for 10 years from the date of filing and will seriously hurt your credit score until it is removed from your credit report. Bankruptcy under Section 13 of the Federal Bankruptcy Code ceases to apply seven years after the filing date. Both will still seriously hurt your credit.
Which debts can be discharged under Chapter 13 of the Bankruptcy Code?
Chapter 13 provides broader immunity than other types of bankruptcy, Krekeler said.
Under Chapter 13, debtors can forgive unsecured debt such as credit card bills, medical bills and personal loans, Duncan said. Unlike Chapter 7 bankruptcy, penalties such as fines, forfeiture, parking and traffic ticket violations and toll violations can also be reversed under Chapter 13, Krekeler added.
Another major difference between Chapter 7 and Chapter 3 bankruptcies is that under Chapter 13, some debts arising from the divorce are forgiven. For example, if one spouse were ordered to pay the other $10,000 to equalize property division, that debt could be forgiven under Chapter 13, but forgiven under Chapter 7. It will not be.
However, some debts such as alimony, child support, spousal support, etc. arising from the divorce are not exempted. Debts that cannot be forgiven include most student loans, certain taxes, criminal fines and reparations, Duncan said.
What Happens in a Chapter 13 Bankruptcy?
Bankruptcy proceedings are divided into several stages. You’ll need a lawyer to go through this process, but here’s an overview of each step.
Hire a Lawyer: This is an optional step, but a highly recommended step given the complexity of a Chapter 13 bankruptcy filing.Louis Landerholm, Real Estate and Bankruptcy Attorney Pacific Cascade Regalstates that you don’t need to hire an attorney to file a Chapter 13 filing, but that “it can be difficult to proceed without the help of a qualified and experienced bankruptcy attorney.”
credit counseling: Before filing for Chapter 13 bankruptcy, individuals must receive credit counseling from an approved agency, Landerholm said.
Bankruptcy petition: After completing credit counseling, the debtor files a bankruptcy petition with the local bankruptcy court. Landerholm said the petition contains “information about your income, expenses, debts, assets, and outstanding contracts and leases.” In addition to the petition, the debtor must also submit relevant documents such as tax returns, payslips, and lists of creditors and debtors.
Appointment of Directors: After filing for Chapter 13, the court will appoint a trustee to manage and oversee the case, Krekeler said.
Suggested payment plan: To proceed to Chapter 13, the debtor must submit a payment plan proposal. It’s a repayment plan that shows how you plan to pay off your debt over the next three to five years, Landerholm explains.
Creditors meeting: The debtor then attends the creditors’ meeting. At the meeting, debtors answer questions from creditors and trustees, Landerholm said.
Approval and Refund: Finally, with court approval, the debtor’s repayment plan is confirmed or approved. When this happens, the debtor pays the bankruptcy trustee costs, and the bankruptcy trustee distributes the funds accordingly, Landerholm said.
Debt forgiveness: Once the debtor completes the repayment plan, which typically spans three to five years, the court will release the remaining eligible debt.
Who Should Consider Declaring Chapter 13 Bankruptcy?
Most personal debtors choose between declaring Chapter 7 or Chapter 13 bankruptcy.
Chapter 7 is the quickest, easiest, and least expensive form of bankruptcy, making it a more attractive option for many debtors. But Krekeler says Chapter 13 may be the only option for certain types of debtors. Some choose Chapter 13 for strategic reasons, he said.
One of the reasons debtors apply for Chapter 13 is because they have too much income to apply under Chapter 7. A high-income debtor may not be eligible to apply for Chapter 7 because: average testThis prohibits a debtor whose household income exceeds the median household income in the area from filing a Chapter 7 application. “These debtors are often pushed or coerced into Chapter 13,” explains Krekeler.
A common strategic reason for choosing Chapter 13 is to forgive debts that cannot be forgiven under Chapter 7, such as some debts associated with a divorce. “for example, If one of the spouses is ordered to pay the other $10,000 to equalize the division of property, that debt may be forgiven under Chapter 13, but not under Chapter 7.” says Krekeler.
Another reason to choose Chapter 13 over Chapter 7 is to maintain control over critical assets such as homes and cars, Carson said. Chapter 7 allows creditors to foreclose on homes and seize assets to recover debts. This is not allowed by Chapter 13.
However, some debtors who wish to opt for Chapter 13 for strategic reasons may not qualify. “Chapter 13 requires the debtor to have a consistent and ongoing income to meet the repayment plan, which may prevent some from pursuing this option.” says Carson. Even for those who meet the Chapter 13 income requirements, there is another important consideration. If the debtor is unable to make the required payments, even with regular income, a Chapter 13 bankruptcy transitions to a Chapter 7 bankruptcy where the liquidation of assets is required to repay creditors. It’s possible, says consumer bankruptcy attorney Derek Jack. Mitten Law OfficeIs called.
What are the implications of filing for Chapter 13 Bankruptcy?
Filing for Chapter 13 bankruptcy may save you from a difficult financial situation. Before filing for bankruptcy, you should always consider all the implications of filing for bankruptcy.
Automatic stay: Filing a Chapter 13 lawsuit automatically imposes a stay, as is the filing of nearly all bankruptcy lawsuits. This means creditors are barred under federal law from initiating or continuing collection efforts, Krekeler said.
Foreclosure proceedings stop: If someone files a Chapter 13 petition, the foreclosure proceedings will be stopped, Krekeler said. This will allow people who are behind on their mortgage payments to “be free from mortgage arrears for periods of up to 60 months,” Krekeler said.
Asset protection: Landerholm said Section 13 of the bankruptcy law will allow people to keep their assets, such as their home and car, while managing their debts. As long as the debtor repays according to the repayment plan, the creditor cannot seize the assets. “This is especially beneficial for individuals with non-exempt assets that they want to protect,” Landerholm explains. But Krekeler warns, “This reservation is not free…the debtor must pay the Chapter 13 plan at least the same amount that the creditor would receive in a Chapter 7 lawsuit.”
Clamp down: In Chapter 13, some debts are reduced through a process called “policing.” This allows the debtor to reduce the portion of the debt secured by an asset such as a car or house to the value of the collateral held by that creditor. The remainder of the claim is unsecured. “This is important because in Chapter 13, unsecured claims are often paid little or not at all,” says Krekeler.
To explain how the crackdown works, Krekeler said: “Consider a debtor who owes $15,000 for a car worth $6,000. However, Chapter 13 states, “The debtor will pay only $6,000 for the auto loan, plus interest as required by the court.” ” The remaining $8,000 will likely be drained.
Damage to credit score: Bankruptcy can be very helpful for your financial situation, but it is not without consequences. A Chapter 13 bankruptcy can hurt your credit score by 100 points or more. The higher your pre-application credit score, the greater the damage.
Chapter 13 Bankruptcy FAQs
A Chapter 13 bankruptcy can remain on your credit report for seven years, at which point it will be removed from your credit report and will stop negatively impacting your credit score.
Chapter 13 gives the debtor time to pay off his debts so he can keep his property.
A Chapter 13 bankruptcy is more expensive and takes longer than a Chapter 13 bankruptcy. Also, filing Chapter 13 bankruptcy will prevent the debtor from filing Chapter 7 bankruptcy for up to six years. “You’re going to lose all your credit cards,” says Jack.