Chapter 13 Bankruptcy Basics
In a Chapter 13 bankruptcy, you keep your assets, but continue paying on your debts over a period of 3-5 years.
This is sometimes called “reorganization bankruptcy” because your debts are in effect “consolidated” by the bankruptcy trustee, and some debts may even be extended to the end of the bankruptcy period, resulting in smaller payments. Some debts (“priority debts”) must be paid in full, while others may be paid only in part.
Not everyone qualifies for a Chapter 13 bankruptcy, particularly those whose disposable income is deemed insufficient to repay their debts. Additionally, as of 2014, secured debts may not exceed $1,149,525 and unsecured debts may not exceed $383,175, regardless of disposable income level.
If an individual is approved for a Chapter 13 bankruptcy, he or she must create a repayment plan to be approved and supervised by the courts. The debtor’s disposable income (income that remains after essential expenses have been paid) must be applied toward repayment of the debts. In addition, the individual under Chapter 13 bankruptcy may not take on any new debt without prior approval of the bankruptcy trustee.
Despite these restrictions, Chapter 13 can have an advantage over Chapter 7 bankruptcy, in that the debtor is allowed to retain his or her assets while the creditors are disallowed from pursuing payment (an “automatic stay”). Unlike Chapter 7, creditors are also barred from going after any cosigners or guarantors during the reorganization period, since payments are still being made. Certain debts that are not dischargeable under a Chapter 7 may also be dischargeable under a Chapter 13, such as those created by a divorce settlement, loans from a retirement plan, or court fees.
How Else is Chapter 13 Bankruptcy Different From Chapter 7 Bankruptcy?
While Chapter 7 bankruptcy is considered a last resort when a person cannot repay a large portion of their debts, Chapter 13 is a form of bankruptcy that enables repayment of unsecured debts over a longer period than the lender originally agreed upon. Chapter 7 bankruptcy proceedings revolve around getting rid of unsecured debt, such as credit cards, medical bills or loans.
In contrast, Chapter 13 bankruptcy allows the borrower to get rid of these same debts while working to make payments on secured debts. This bankruptcy process can involve making monthly payments toward secured debts like a house or car.
How Chapter 13 Bankruptcy Works
Chapter 13 bankruptcy is a solution for resolving debts that you intend to pay. It allows you to keep your assets by giving you three to five years to pay off secured debts using an agreed-upon amount of your disposable income. This is a court-ordered plan to repay creditors on a strict timeline and requires a no-frills approach to living.
These are the steps involved in filing for Chapter 13 bankruptcy in Tennessee.
- Hire a Bankruptcy Lawyer: An experienced lawyer can help you understand your options and advise you on which type of bankruptcy makes the most sense for your financial situation.
- File a Bankruptcy Petition: Once you and your bankruptcy attorney determine that Chapter 13 bankruptcy is the route you want to take, you can file your petition.
- Trustee Appointment: The court appoints a trustee who will oversee your bankruptcy case. They notify you by sending you a Notice of Appointment of Trustee.
- Notice to Debt Collectors: Once debt collectors receive official notice of your petition, they can no longer harass you for repayment.
- Create Your Repayment Plan: Within two weeks of filing for Chapter 13 bankruptcy, you must submit a repayment plan that outlines your intent to repay debts.
- Meeting With Creditors: You will have to meet with creditors and answer any bankruptcy questions related to your petition.
- Court Hearing: This hearing is where your payment plan is finalized.
Then, it’s time to start making payments.
Reasons to File Chapter 13 Bankruptcy
Talking to an attorney in Shelby County, Tennessee, like our team at John E. Dunlap, P.C., Attorney at Law, is necessary to understand what type of bankruptcy is right for your financial situation. You might want to file Chapter 13 bankruptcy rather than Chapter 7 if you own property or have a large amount of secured debt.
Advantages of Chapter 13 Bankruptcy include:
- Saving your home from foreclosure
- Reducing the pressure of dealing with multiple creditors
- Allowing you to catch up on secured debts through a plan payment
- Potentially improving the score on your credit report
Before you decide to file for bankruptcy, always seek legal counsel and make sure you understand the difference between the various filing methods and their ramifications on you, your family, your business, and any cosigners or guarantors for your debts. Attorney Dunlap has over 20 years experience in bankruptcy law and can explain the process in plain English, while helping you navigate through the experience from beginning to end.
If you’re facing the prospect of bankruptcy, call us today for a free consultation at (901) 320-1603.