Chapter 13 Bankruptcy provides for adjustment of debts of an individual with regular income. (Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.)
A chapter 13 bankruptcy is also called a wage earner's plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor's current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period "for cause."
If the debtor's current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. 11 U.S.C. §1322(d). During this time the law forbids creditors from starting or continuing collection efforts.
Advantages of Chapter 13
Chapter 13 offers individuals a number of advantages over liquidation under chapter 7. Perhaps most significantly, chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the chapter 13 plan on time. Another advantage of chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on "consumer debts." This provision may protect co-signers. Finally, chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 protection.
Chapter 13 Eligibility
Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual's unsecured debts are less than $336,900 and secured debts are less than $1,010,650. 11 U.S.C. § 109(e). These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor. Id.
An individual cannot file under chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e). In addition, no individual may be a debtor under chapter 13 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111. There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during required credit counseling, it must be filed with the court.
There are many reasons why people choose Chapter 13 bankruptcy instead of Chapter 7 bankruptcy. Generally, you are probably a good candidate for Chapter 13 bankruptcy if you are in any of the following situations:
| 1) | You have a sincere desire to repay your debts, but you need the protection of the bankruptcy court to do so. You may think filing Chapter 13 bankruptcy is simply the "Right Thing To Do" rather than file Chapter 7. |
| 2) | You are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original agreement. You cannot do this in Chapter 7 bankruptcy. You can make up missed payments only in Chapter 13 bankruptcy. |
| 3) | You need help repaying your debts now, but need to leave open the option of filing for Chapter 7 bankruptcy in the future. This would be the case if for some reason you can't stop incurring new debt. |
| 4) | You are a family farmer who wants to pay off your debts, but you do not qualify for a Chapter 12 family farming bankruptcy because you have a large debt unrelated to farming. |
| 5) | You have valuable nonexempt property. When you file for Chapter 7 bankruptcy, you get to keep certain property, called exempt. If you have a lot of nonexempt property (which you'd have to give up if you file a Chapter 7 bankruptcy), Chapter 13 bankruptcy may be the better option. |
| 6) | You filed a Chapter 7 bankruptcy within the previous eight years. You cannot file for Chapter 7 again until the eight years are up. |
A Chapter 13 can be filed if:
| • | The debtor received a discharge under Chapter 7, 11 or 12 more than four years ago; or |
| • | The debtor received a discharge under Chapter 13 more than two years ago. |
| • | You have a co-debtor on a personal debt. If you file for Chapter 7 bankruptcy, your creditor will go after the co-debtor for payment. If you file for Chapter 13 bankruptcy, the creditor will leave your co-debtor alone, as long as you keep up with your bankruptcy plan payments. |
| • | You have a tax debt. If a large part of your debt consists of federal taxes, what happens to your tax debts may determine which type of bankruptcy is best for you. |
You can discharge (wipe out) debts for federal income taxes in Chapter 7 bankruptcy only if all of these five conditions are true:
| 1) | The taxes are income taxes. Taxes other than income, such as payroll taxes, Trust Fund Recovery Penalty or fraud penalties, can never be eliminated in bankruptcy. |
| 2) | You did not commit fraud or willful evasion. You did not file a fraudulent tax return or otherwise willfully attempt to evade paying taxes, such as using a false Social Security number on your tax return. |
| 3) | You pass the three-year rule. The tax return was originally due at least three years before you file for bankruptcy. |
| 4) | You pass the two-year rule. You actually filed the tax return at least two years before filing the bankruptcy -- having the IRS file a substitute return for you doesn't count unless you agreed to and signed the substitute return. |
| 5) | You pass the 240-day rule. The income tax debt was assessed by the IRS at least 240 days before you file your bankruptcy petition, or has not yet been assessed. |
If any of the following situations apply to you, you will have to add time to the three-year, two-year or 240-day rules for your debts to qualify for discharge in bankruptcy:
| 1) | If you submitted an Offer in Compromise, the 240-day rule is delayed by the period of time from when the Offer is made until the IRS rejects it or you withdraw it, plus 30 days. |
| 2) | If you obtained a Taxpayer Assistance Order from an IRS Problems Resolution Officer preventing the IRS from collecting, the bankruptcy court may require that you add the time collection was suspended to the three-year, two-year and 240-day requirements. |
| 3) | If you filed a previous bankruptcy case, all three time periods stopped running while you were in the prior bankruptcy case. You must add the length of your case plus six months to all three. |
Caution! A Chapter 7 bankruptcy will wipe out only your personal obligation to pay the debt. Any lien recorded before you file for bankruptcy remains.
After your bankruptcy, the IRS can seize any property you owned at the time the bankruptcy was filed. But this doesn't mean that after your bankruptcy case is over the IRS will come and grab your property. Post-bankruptcy, the IRS tends to seize only real estate and retirement accounts or pensions. And even then, IRS seizures generally take place only when a taxpayer has made no efforts to otherwise resolve the problem. Furthermore, IRS collectors must obtain approval from their supervisors before seizing a house or pension. The IRS is very concerned about negative publicity.
| New Bankruptcy Law taking effect on October 17, 2005: Chapter 13 cannot be filed unless:
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Take Action Today!
Bankruptcy is a last resort. It is only recommended in those situations where all other alternatives have been exhausted and should only be undertaken if it is in your best interest. If you believe bankruptcy is something you'd like to explore, United Law Group can help you to navigate through the complex maze of laws and regulations that constitute the Federal Bankruptcy Regulations.
Call 1-800-680-5717 for a free consultation with an experienced lawyer.
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