Over 757 thousand bankruptcy petitions were filed in the United States in 2020 alone, with the majority of them being personal (non-business) filings. Many of these petitions result from job loss, medical expenses, or financial difficulties aggravated by the nationwide lockdowns following the pandemic. If you are struggling with debt, you may be looking for options to help you get back on track financially, and may be considering if filing a Chapter 13 bankruptcy petition is right for you. Our bankruptcy law firm assists countless clients in the same situation. Here are some basics about Chapter 13 as well as common mistakes to avoid.
What Is Chapter 13 Bankruptcy and How Does It Work?
The U.S. Courts define Chapter 13 Bankruptcy as a “wage earner’s plan”, i.e., a plan that enables individuals who earn regular income to repay all their debts over a period of time. The debtor (the person who owes money to creditors) proposes a plan that includes installment payments to creditors lasting for at least three years, and never more than five years. In return, creditors cannot initiate or continue collection efforts.
Chapter 13 Bankruptcy may offer a way for individuals to reorganize their finances and find a way out of unmanageable debt. Anyone wanting to file for Chapter 13 must be earning reliable monthly income to qualify. If the debtor’s monthly income is lower than the state median income, the payment plan will likely last for three years, unless otherwise specified by a court.
How Is Chapter 13 Bankruptcy Different Than Chapter 7?
The main difference between Chapter 7 and Chapter 13 bankruptcy is the debtor’s ability to keep their property rather than selling it to repay creditors. When you choose to use Chapter 7 to file for bankruptcy, you will be required to liquidate or sell some or all of your property in order to pay off debt. This is often the best choice for someone who doesn’t own many assets or whose income is limited. This is why Chapter 7 bankruptcy is typically referred to as liquidation bankruptcy. Both businesses and individuals may file for Chapter 7, and eligibility requirements may affect your ability to qualify.
On the other hand, Chapter 13 is known as reorganization bankruptcy because it allows you to keep your property (including secured assets) as long as you successfully complete a three to five-year payment plan determined by the court. This means those who file under Chapter 13 are able to stop foreclosure proceedings and may be able to cure delinquent mortgage payments over time. Businesses cannot file for Chapter 13, only individuals with regular income and unsecured debts totaling not more than $419,275.00 and secured debts of no more than $1,257,850.00. In any case, you may want to consult a seasoned bankruptcy attorney to see which chapter will work best for your situation.
What Are the Worst Mistakes That Need to Be Avoided When Filing For Chapter 13?
There are many mistakes that must be avoided by debtors filing for Chapter 13, but the top 3 worst mistakes are without a doubt, missing payments, collecting new debt and hiding assets. Filing for Chapter 13 bankruptcy is not something to be taken lightly. Missing a Chapter 13 payment can quickly result in undue headaches such as creditors obtaining permission to foreclose on your house or repossess your vehicle. It is best to avoid missing a payment, and if you do, you need to make up for it as soon as possible.
Collecting new debts shortly before filing for Chapter 13 is usually frowned upon by the courts, and may result in the court denying your bankruptcy filing or not allowing the newly-accrued debt to be discharged. If your bankruptcy filing is approved, you may find yourself paying both the new debt as well as your bankruptcy payments, on top of all your regular living expenses. Last, there is no reason to hide any assets when filing for Chapter 13. Not only is it considered legal deception, but it can also hurt your chances of having your case accepted by the court. It is also unnecessary, because the objective of using Chapter 13 is to protect your assets from creditors – trying to hide them or transfer them to family and friends may be considered fraud and will only harm your case, possibly even costing you a discharge.
How Can a Bankruptcy Attorney Help Me?
Filing for bankruptcy is a serious step and should only be considered after you have exhausted all other avenues and still find yourself buried in unmanageable debt. If bankruptcy is your last resort, recruiting the help of a seasoned bankruptcy attorney is fundamental. While you are legally allowed to file for bankruptcy without an attorney, you might be harming your chances of successfully receiving approval for a payment plan, and it may end up costing you more in the long run.
Not only can an attorney help you navigate important decisions (such as ‘should you file for Chapter 7 or Chapter 13?’), but they can also be instrumental throughout the process by carrying out tasks such as applying the means test, valuing your property, applying exemption rules and determining which debts will be eliminated (discharged) and which will remain. Statistically speaking, less than 2% of Chapter 13 filers who represented themselves were able to secure a payment plan, according to a report by the U.S. Bankruptcy Court for the Central District of California (the busiest bankruptcy court in the country)–represented filers were 23 times more likely to have their Chapter 13 plan confirmed! If you are considering filing Chapter 13 bankruptcy, the attorneys at Israel & Gerity, PLLC, are here to assist you. Contact us for a free consultation to learn more.