Chapter 13 bankruptcy can be classified as a restructuring bankruptcy. This is in contrast to Chapter 7, which is a liquidation bankruptcy.
You must give all non-exempt property in Chapter 7 bankruptcy to get most of your debts wiped out.
Chapter 13 bankruptcy is different from the liquidation process. You won’t have to give up any property. Instead, you will need to create a structured repayment plan which outlines how your income will be used to repay your debts over time. This typically takes three to five years.
Eligibility for Chapter 13 Reorganization Bankruptcy
Before you think about filing Chapter 13 bankruptcy, it is necessary to prove that you are eligible. Chapter 13 bankruptcy is different from Chapter 7. Chapter 13 uses your income to pay your creditors. Chapter 13 bankruptcy is not available to you if your income is not sufficient or irregular.
You may also be prevented from filing Chapter 13 bankruptcy because of certain debt limits. Unsecured debt means that your creditor doesn’t have the right to take any item of property if the debt isn’t repaid. A secured debt, on the other hand, is where the creditor promises to pay the debt in full.
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Reorganization Bankruptcy Process
You must first get credit counseling from an agency that has been approved by the United States Trustee. These agencies may charge a fee for their services but they are required to offer free or very low-cost counseling to anyone who can prove that they are unable to pay. You will need to pay an additional fee for Chapter 13 bankruptcy filings.
Repayment Plans for Chapter 13 Reorganization Bankruptcy
The repayment plan is the most crucial and difficult part of a Chapter 13 bankruptcy. The repayment plan will detail how much you will pay each creditor to reduce your debts. While there is not a standard, accepted form, most courts have created their own forms that can be helpful in determining your repayment plan.
What amount do you need to pay?
You must include a plan for paying certain debts fully in your Chapter 13 repayment plan. These debts, also known as “priority loans”, are more important than others and can be added to your bankruptcy repayment plan. These debts can include taxes due and owing, as well as child support payments.
Your repayment plan must also include other items. You must include payments on secured debts such as car or home payments. These late payments must also be included in your repayment plan if you are behind on any secured debt payments.
The repayment plan must show that you have any income available after paying secured debts. This money can be used to pay unsecured debts. Although it may not be necessary to make payments if there is no disposable income, you must still show good faith efforts to repay your unsecured loans.
Length of the Repayment Plan
If your six-month average monthly income was higher than the state’s median income, then you must propose a five-year repayment plan. A three-year repayment plan will be offered if your income over the same period is lower than the state’s median income. Your repayment plan will terminate if all your debts are paid off before the end.
Failure to Make Payments on a Plan
You may find yourself in a situation where you are unable to pay your repayment plan. The bankruptcy trustee might be able modify your repayment plan to suit your circumstances if you lose your job or are unable to make payments on your repayment plan. If you are hospitalized for a prolonged period, and making payments on your repayment plan would be an undue hardship, a bankruptcy judge might decide to discharge your debts.
You may be able convert your Chapter 13 bankruptcy reorganization to a Chapter 7 bankruptcy liquidation bankruptcy if neither of these options were available. You can also ask the bankruptcy court for dismissal of your bankruptcy case. You would still owe all your debts and interest that creditors didn’t charge you during your bankruptcy proceedings.
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The End of Chapter 13 Reorganization Bankruptcy
The bankruptcy court will wipe out all remaining debts if you stick to your repayment plan. Before a bankruptcy court can discharge your debts however, you will need to show that you have paid off all non-dischargeable debts. You also must prove that you have taken a budget counseling course through an agency approved by the United States Trustee.