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What Is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is an excellent way for people with too much debt to wipe the slate clean and get a fresh start. This article discusses the Chapter 13 bankruptcy process, describes how it differs from a Chapter 7 bankruptcy, and explains what you can expect in most cases.

How to File

Using an Attorney

To begin, it is recommended that you consult a bankruptcy attorney in your area who can examine your case and guide you through the bankruptcy process. Although it is possible to file bankruptcy without the help of an attorney, it is extremely difficult to do so unless you have extensive experience in this area of the law as well as strong financial sense and attention to detail.

As bankruptcy is one of the most complex legal fields, the vast majority of debtors use an attorney to ensure that everything goes quickly and smoothly. There are also various rules on when you can and can’t file bankruptcy. For instance, depending on which chapter you filed, you can’t file bankruptcy if you’ve already filed in the past 6–8 years.

Collecting Financial Records and Proof of Income

Once you have retained an attorney to assist you, the attorney will begin to have you collect your financial records and proof of income. This information will help the attorney compile your bankruptcy application that will be filed with the court. One thing to keep in mind is that it is essential that you are 100% honest with your attorney about your debts and your possessions.

Many people mistakenly believe that they will lose certain prized possessions if the bankruptcy court finds out about them. However, most personal property ends up being kept after bankruptcy because they fall under one exception or another. If you tell your attorney about all your property, then your attorney can usually protect it.

Don't Hide Any Property

The worst thing you can do is try to hide the property, which is considered a criminal violation, and can result both in you losing the property and receiving a criminal charge.

Also, if you leave off any debts or creditors from your application, those debts won’t be discharged at the end of your bankruptcy.

Credit Counseling

When filing bankruptcy you will be required to take two brief credit counseling courses. You must take the first course sometime within the six months prior to your filing. The course only takes about an hour and a half to two hours to complete, and you may take it either by phone or online. During the course, you will discuss your financial situation and try to determine if filing bankruptcy is your best option.

Your attorney should recommend a couple of credit counseling agencies to you. The fee for the course is usually about $30–50, and if you can’t afford to pay it, you can often get the fee waived or a reduced rate. Upon completion of the course, you will receive a certificate to give to your attorney.

Chapter 13 vs. Chapter 7 Bankruptcy

A Chapter 13 bankruptcy takes longer and is a bit more complex than a Chapter 7. Unfortunately, you don’t exactly get to pick which one to file. There are many criteria that determine which is the appropriate bankruptcy for you, including the amount of debt you have compared to your disposable income.

The good news is that both chapters will ultimately wipe away most if not all of your debt, however the manner in which this is accomplished differs with each chapter.

Cost of Chapter 13 vs. Chapter 7

First of all, Chapter 13 costs more to file. A Chapter 7 often runs about $300–$500, while a Chapter 13 can cost anywhere from $1,500–$5,000 depending on where you live. The reason the two differ so much is because a Chapter 13 is more complex and requires more work for your attorney and the court. Luckily, you don’t have to pay all that upfront in a Chapter 13. The cost of it will be included in your repayment plan paid throughout the bankruptcy process. Chapter 13 bankruptcy usually lasts about 60 months (5 years), while Chapter 7 bankruptcy takes only about 4–6 months. A person appointed by the bankruptcy court (called a “Trustee”) oversees every bankruptcy case.

You Will Pay Back What You Can Afford

While you are in a Chapter 13 bankruptcy you will be making regular payments toward your debt. Fortunately, you will usually only have to pay back a very small portion of your overall debt, and the court will only make you pay what you can afford.

Get Back On Your Feet

Essentially, instead of paying off all your debts, you will be paying your attorney instead, and at only a fraction of what you initially owed! This will go a long way to helping you get back up on your feet.

The Automatic Stay

Another great thing about both types of bankruptcy is that something called the “automatic stay” goes into effect immediately when you file. The automatic stay halts your creditors from contacting you and allows you to stop paying certain debts until after the bankruptcy process ends. This means you can take a sigh of relief because you won’t have to deal with any more annoying phone calls or rude people disturbing you at home. There is a good chance that filing bankruptcy will get rid of your debts so that you never have to deal with those creditors again.

The Meeting of the Creditors

Once your attorney files your bankruptcy application you will go to the “Meeting of the Creditors.” This name is a bit of a misnomer because it is very rare for any creditors to actually show up at these meetings to question you. The meeting typically takes place outside of a courtroom and involves the Trustee asking you simple questions in order to ascertain the accuracy of your application and ensure that all the necessary information has been included. If something was accidentally left out, your attorney is usually given an opportunity to amend your application and cure any errors.

Secured Debts vs. Unsecured Debts

Secured Debts

One thing to pay attention to during your bankruptcy is your secured debts. A “secured debt” is any loan you have that pledges your personal property as collateral. Your personally property thus “secures” that your lender will get paid, and if you default by not making payments on the loan, then your lender can seize your personal property and sell it to recoup its losses.

Home loans and car loans are the typical examples of secured debt. You will need to be current on your secured debts before filing bankruptcy and then continue paying these throughout the bankruptcy process; otherwise, you may lose the property pledged as collateral (i.e. your home or car).

Unsecured Debts

An “unsecured debt” is any debt that does not have property pledged as collateral on it. Thankfully, you won’t have to worry about continuing to make payments on your unsecured debts anymore unless they fall into a few specific categories:

  • Debts or creditors not listed on your application
  • Domestic support obligations
  • Criminal penalties
  • Money owed to the government
  • Recent IRS debts
  • Certain debts for civil violations
  • Most student loan debts

Confirmation Hearing and Chapter 13 Repayment Plan

If your creditors make objections to your proposed repayment plan, your attorney will negotiate with them to amend the plan until it is acceptable. Once there are no more objections, the court will confirm your repayment plan and you will begin making payments.

While in repayment, you will submit annual income and expense statements to the court to show that your plan is still feasible. You will also have to complete your second credit counseling course after confirmation. Assuming everything goes smoothly and you continue to make your bankruptcy payments on time, your debt will be discharged at the end of your repayment.