Chapter 13 bankruptcy lets you enter into a court- approved plan to deal with your debts over three to five years. some debts must be paid in full (back taxes are the most common examples), while others may be paid only in part. the basic idea is that you must devote all of your disposable income to whatever plan is approved by the bankruptcy court. with a few exceptions, Chapter 13 doesn’t require you to give up any property—for that reason, it’s the bankruptcy of choice for folks who have significant amounts of nonexempt property or property that has a sentimental value.
if you do file for Chapter 13 bankruptcy, the minimum amount you will have to pay to your unsecured creditors is roughly equal to the value of your nonexempt property. But you may have to pay more: the new bankruptcy law provides guidelines for calculating exactly how much you must pay into your plan, based on the size of your income:
• if your current monthly income (as defined by the bankruptcy law—see “who Can File for Chapter 7 Bankruptcy?” above) is more than the median family income for your state, you must pay all of your “disposable income” into your plan for five years. to calculate your disposable income, you must use expenses dictated by the irs, which could be significantly less than your actual expenses. this means that you may be obligated to pay more money into your plan than you
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actually have left over each month, after paying your bills and living expenses.
• if your current monthly income is less than the state median, you can propose a three-year repayment plan. you can also calculate your disposable income using your actual expenses, rather than the irs standards.
to file for Chapter 13 bankruptcy, you fill out the same forms as in a Chapter 7 bankruptcy and file them with the bankruptcy court along with a filing fee of $274. in addition, you must file your most recent tax return and show that you are current on your taxes for the last four years. you must also file a plan to repay your debts under the new bankruptcy law’s guidelines and serve a copy of the plan on each of your creditors. with the possible exception of current payments on your mortgage and car note, you make payments under the plan directly to the bankruptcy trustee, who in turn distributes the money to your creditors. when you complete your plan, any remaining unpaid balances on unsecured, dischargeable debts are wiped out.
Chapter 13 requires you to pay off your debts over time, but few filers pay back 100% of what they owe.
the typical Chapter 13 plan pays 100% of child support (unless the support has been assigned to a government agency, in which case the plan might pay a lesser percentage), back taxes, and other debts classified as
“priority” debts, and some lesser percentage of other unsecured debts, depending on the debtor’s income and the value of the debtor’s nonexempt property.
like Chapter 7 bankruptcy, Chapter 13 bankruptcy doesn’t wipe out all types of debts. domestic support obligations, criminal penalties, certain tax debts, debts arising from injuries caused by your intoxicated driving, certain debts or creditors you don’t list on your bankruptcy papers, and debts arising from your fraudulent conduct all may survive your bankruptcy filing, whether you file under Chapter 7 or Chapter 13. and, as in Chapter 7, student loan debts will be discharged only if you can show that repaying the loan would cause a substantial hardship. (For more on each of these types of debts, see Ch. 9.) debts arising from a civil judgment against you for maliciously or willfully injuring or killing someone will also survive a Chapter 13 bankruptcy.
in addition to these debts, there are certain debts that are discharged only in Chapter 13—that is, these debts will survive Chapter 7 bankruptcy, but will be wiped out at the end of your repayment plan if you file under Chapter 13. these debts include:
• marital debts (other than for support) created in a divorce or settlement agreement
• debts incurred to pay a nondischargeable tax debt
• court fees
• condominium, cooperative, and homeowners’
association fees
• debts for loans from a retirement plan, and
• debts that couldn’t be discharged in a previous bankruptcy.
you can file for Chapter 13 bankruptcy at any time, even if you got a Chapter 7 bankruptcy discharge the day before. however, you can’t get your Chapter 13 discharge until four years have passed since you filed a previous Chapter 7 case.
if you start, but are not able to finish, a Chapter 13 repayment plan—for example, you lose your job six months into the plan and can’t make the payments—
the trustee may modify your plan. the trustee may give you a grace period (if the problem seems temporary), reduce your total monthly payments, or extend the repayment period. as long as it looks like you’re acting in good faith, the trustee will try to accommodate and help you across rocky periods. if it’s clear you won’t be able to complete the plan because of circumstances beyond your control, the court might let you discharge your debts on the basis of hardship. examples of hardship would be a sudden plant closing in a one- factory town, or a debilitating illness.
if the bankruptcy court won’t let you modify your plan or give you a hardship discharge, you still have two options:
• you can convert your case to a Chapter 7 bank- ruptcy (unless you received a Chapter 7 discharge in a case filed within the previous eight years).
• you can ask the bankruptcy court to dismiss your Chapter 13 petition, which would leave you in the same position you were in before you filed, except you’ll owe less because of the payments you made on your debts. if your Chapter 13 bankruptcy is dismissed, your creditors may add any interest that was abated during your Chapter 13 case to the total amount you owe.
Do You Qualify for Chapter 13 Bankruptcy?
Like Chapter 7, there are several requirements you must meet in order to qualify for Chapter 13 bankruptcy:
• You must file as an individual. Only individu- als, not business entities (such as partnerships or corporations), can file for Chapter 13.
• Your debt must not be too high. Your total secured debt (debt for which you have pledged collateral or otherwise gives the creditor the right to seize property if you don’t pay) may not exceed $1,010,650, and your total unsecured debt may not exceed $336,900.
• You must be able to propose a legally feasible repayment plan. If you have sufficient income to pay all of your priority debts (for instance, child support and tax debts), make required monthly payments—and pay back any arrearages—on your secured debts (such as a mortgage or car note), and pay at least some money toward your unsecured debts over the next five years, you can probably propose a Chapter 13 plan that will pass legal muster.
One way to figure out whether you can propose a feasible plan is to take the means test—an eligibility requirement for Chapter 7 that asks higher income filers to show that they cannot propose a feasible Chapter 13 repayment plan. If the means test shows that you will have at least some money left over each month to pay toward your unsecured debts, you should be able to come up with a feasible Chapter 13 plan. The means test is covered in detail in Ch. 6.
You may qualify for Chapter 13 even if you don’t have sufficient disposable income to complete your plan. The new bankruptcy law assumes that your monthly income during your plan will be the same as your average income during the six months before you filed for bankruptcy. If you lost a job or otherwise experienced a drop in income during those six months, your actual income could be quite a bit less than the law assumes it will be. In addition, certain higher-income filers will have to calculate their expenses using IRS standards, which are often less than
their actual living expenses. All this means that you may not be able, as a practical matter, to make the payments required by a Chapter 13 plan, even if you qualify to file under the figures used in the new law.
Chapter 13 May Reduce Secured Debts That Are Heavy With Interest
Chapter 13 bankruptcy allows you to break certain secured debts into two parts: the part that is secured by the fair market value of the collateral, and any part of the debt that is unsecured because it exceeds the value of the collateral. You must pay the replacement value of the collateral (the secured part) in your Chapter 13 plan, but you can discharge the unsecured portion along with your other unsecured debts. This procedure is popularly referred to as a “cramdown.”
For example, people often owe more on a car than the car is worth. This is because the car note includes a lot of interest, and most cars depreciate in value fairly rapidly. In some cases, Chapter 13 allows you to cram down the debt on the car to the car’s replacement value (what it would cost to purchase the car from a retail vendor, considering its age and condition) and get rid of the rest of the debt over the life of your plan. You may also be able to cram down debts for other types of property, including real estate in some situations. However, there are a couple of exceptions to the cramdown rule:
• You can cram down a car contract only if you bought the car more than 30 months before filing for bankruptcy.
• You can cram down contracts on other types of property only if you bought the property more than a year before filing for bankruptcy.
Resources for Chapter 13 bankruptcy. For general information on Chapter 13 bankruptcy, get a copy of The New Bankruptcy: Is It Right for You?, by Stephen Elias (Nolo). If you are interested in filing for Chapter 13 bankruptcy, see Chapter 13 Bankruptcy: Repay Your Debts, by Stephen Elias and Robin Leonard (Nolo), which provides all the forms and instructions necessary to complete your own Chapter 13 bankruptcy.
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