Chapter 13 bankruptcy is a legal process available to individuals and married couples in the United States who seek to reorganize their finances and repay their creditors over a period of three to five years. Also known as a wage earner's plan, Chapter 13 offers debtors the opportunity to retain their assets while establishing a feasible repayment plan under the supervision and approval of the courts. This article will delve into the key aspects of Chapter 13 bankruptcy, its eligibility requirements, and its benefits compared to other bankruptcy options.
Chapter 13 bankruptcy is a financial reorganization process that enables debtors to create a plan to repay their outstanding debts over an extended period. The debtor must compile a comprehensive list of creditors, debts owed, income sources, monthly expenses, and owned property as part of the bankruptcy filing. Once the filing is complete, an impartial bankruptcy trustee is appointed, and the debtor makes regular monthly payments to the trustee, who then distributes the funds to the creditors according to the agreed-upon plan.
Eligibility and Limitations:
To qualify for Chapter 13 bankruptcy, individuals or married couples must meet specific criteria. The debt limits for filing Chapter 13 bankruptcy vary and are subject to periodic adjustments. As of February 2019, the limits were $419,275 for unsecured debt and $1,257,850 for secured debt. Additionally, filers must have completed credit counseling to be considered eligible for Chapter 13. Unlike Chapter 7 bankruptcy, which involves the liquidation of assets, Chapter 13 allows debtors to retain their property while repaying their debts over time.
Chapter 13 vs. Chapter 7 and Chapter 11:
Chapter 13 bankruptcy differs from Chapter 7 and Chapter 11 bankruptcy in several ways. Chapter 7 bankruptcy involves the complete discharge of existing debts, allowing individuals to start anew. However, Chapter 7 may require the surrender of certain assets, including a home in some cases. On the other hand, Chapter 11 bankruptcy is primarily used by businesses, as it is complex and expensive. Chapter 13 provides an alternative to Chapter 11 for individuals who have a regular income but do not qualify for Chapter 7. Moreover, Chapter 13 can protect co-signers of the debtor's loans from being held responsible for the debts.
Chapter 13 and the CARES Act:
The COVID-19 pandemic brought about economic challenges for many individuals and businesses. The CARES Act, enacted on March 27, 2020, made changes to bankruptcy laws to provide relief to those affected. These changes include excluding federal emergency relief payments related to COVID-19 from the calculation of "current monthly income" and "disposable income" in Chapter 13 bankruptcy. The Act also extended the repayment plan period from three to five years, allowing for a maximum extension of seven years. These changes apply to bankruptcies filed after the CARES Act was enacted and remain in effect for one year.
Summary
Chapter 13 bankruptcy is one of the most often used. It is similar to a Chapter 7, but it does not have income limits.
It involves liquidating the assets of the debtor and making payment arrangements over a longer period of time than Chapter 7. Chapter 13 allows a debtor to propose a schedule for repaying debts that seems reasonable to the bankruptcy judge.
It is for individuals who can prove steady income. Often Chapter 7 is filed by people who are impoverished, while Chapter 13 is the middle-to-upper class equivalent.
The debts are not paid off at one time, generally, but on a schedule of a few years. Part of the reason that Chapter 7 doesn’t have a drawn out repayment schedule is because there in no income to support it. For Chapter 13, there is an income to support a repayment schedule.
This filing will also cover repayment schedules for substantial long term debts such as home mortgages and car payments.
Chapter 13 insulates the debtor from any future lawsuits or solicitations from the creditors named in the filing by establishing a trust, to which the debtor pays the debt service payments. The creditors are only permitted to take up their business with the trustee.
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