As a consumer or business owner, you may have different expectations when filing a Chapter 13 bankruptcy. A Chapter 13, unlike a Chapter 7, is a reorganization, also called a wage earners’ plan, but is also helpful for small business owners who wish to continue operating. It is also for homeowners facing foreclosure or who wish to keep large items of personal property that would otherwise be seized as nonexempt property during a Chapter 7 proceeding.
Do I Have to Qualify?
Like a Chapter 7, you do have to qualify for a Chapter 13 filing. Currently, your unsecured debt cannot be more than $383,175 and your secured debt may not exceed $1,149,525. These limits just increased and will increase again in 2016.
Since this plan requires a repayment plan, you must also have a secure and steady income and present an acceptable repayment plan of no more than 5 years. It must include any mortgage arrearages. Further, you have to be current on your income tax filings for the past 4 years and be able to produce your returns.
Should you qualify under this criteria, you also have to complete a credit counseling class within 6 months of filing.
The Automatic Stay
One of the benefits of any bankruptcy filing is the automatic stay that goes into effect when you file. Consequently, creditors may no longer call or contact you. All civil proceedings are halted. If your paycheck is being garnished or your bank account levied, these cease as well and any funds seized may have to be returned.
For distressed homeowners facing foreclosure, this proceeding stops as well. Any arrearages you have will be included in the plan and repaid over the duration of your plan, which may not exceed 60 months so long as you continue to make your scheduled monthly payments.
Chapter 13 Plan
You have to file a repayment plan either when you file or within a certain time of filing your petition. It provides for fixed payments made either monthly or bimonthly that is distributed by the Trustee. Your creditors may receive less than what is owed to them. You must start making payments to your secured and priority creditors within 30 days of filing if you are not already making them.
Your debts are categorized into priority, secured and unsecured. Priority debts include child support and taxes. Secured debts have collateral involved while unsecured creditors have no special rights to collect for their debts. Unsecured creditors may not receive anything under a Chapter 13 in some cases.
Meeting of Creditors
There will be a meeting scheduled with the Trustee and creditors, called a 341 hearing, to review your case. Before this meeting, you are obligated to continue making payments to your secured creditors such as for home and car loan payments. This meeting is held in a room outside the court and may be attended by creditors. You will sworn and asked to provide a government-issued photo identification, such as a driver’s license and Social Security card. The Trustee will ask you questions about your petition, property, business and finances. Usually, your meeting only takes a few minutes.
Chapter 13 Plan Confirmation
In 30 to 45 days after the meeting of creditors, the judge will hold a confirmation hearing to determine if your repayment plan is acceptable. Creditors are given 28 days notice of this hearing and to file any objections. Having a bankruptcy attorney prepare your plan in complex cases makes sense to avoid objections and to have your plan quickly approved.
For small business owners, you may have an unfavorable lease agreement renegotiated or other contracts redone pursuant to your reorganization plan so that your business can continue to operate and your creditors paid off, although over a longer time.
Making the Payments
If your plan is approved, you will have to begin making your lump sum payments as scheduled and continue to make them for either 3 or 5 years, depending on your plan’s duration. If you are delinquent, you should contact your attorney promptly and explain why there has been a change in circumstances. In many cases, your plan may be modified. In other cases, however, the Trustee may convert your case to a Chapter 7 if you are no longer capable of adhering to the plan. If you have mortgage arrearages that are affected, you need to contact your attorney to discuss your options.
Otherwise, your business can continue to operate while your creditors are paid, or you can rest knowing that your home can be saved and your obligations fulfilled.