Also commonly referred to as a repayment plan, Chapter 13 bankruptcy allows debtors to pay off their unsecured debt over 3 to 5 years. Generally, the amount you will be required to pay is based on your income minus your expenses.
How Long & Costly Is Chapter 13 Bankruptcy?
The cost of declaring Chapter 13 bankruptcy should not cause you alarm. Attorney fees for Chapter 13 bankruptcy cases can run between $3,000 and $3,500. However, in some instances, hourly rates are more appropriate.
Chapter 13 bankruptcy declarations also require an administrative filing fee of $313, while the cost of your credit report and counseling course is $47.
What Are the Eligibility Requirements?
There are specific requirements in place that you must meet if you hope to qualify for Chapter 13 bankruptcy. Under Minnesota law, this bankruptcy may be available to those with debt not exceeding:
- $1,149,425 in secured debt
- $383,175 in unsecured debt
You must also:
- Have a regular source of income such as employment
- Have income more than your regular monthly living expenses to pay your outstanding debts
- Not be prohibited from a Chapter 13 bankruptcy petition due to a prior bankruptcy discharge
- Have filed your income tax returns for the last four years
- Be a married couple filing jointly or an individual
- Be up-to-date on your alimony, spousal maintenance, or child support payments
Is Chapter 13 Right for You?
Still, you may be unsure whether a Chapter 13 bankruptcy declaration is suitable for you. Chapter 13 could be a good fit for individuals who:
- Hope to negotiate a repayment plan with the Internal Revenue Service (IRS) due to outstanding tax debts
- Make too much to qualify for Chapter 7 bankruptcy
- Have non-exempt assets that could be lost if you pursued a Chapter 7 bankruptcy declaration
- Have gotten behind on their mortgage payments but hope to retain possession of their home
Chapter 13 may be a good fit for you, but there may be other bankruptcy or debt relief options that could be a better fit. These include:
- Chapter 11 bankruptcy – Chapter 11 bankruptcy is usually for small business owners and corporations. However, individuals may file too.
- Chapter 7 bankruptcy – This bankruptcy involves you selling your assets and property for the sole benefit of your creditors.
What Are Chapter 13 Repayment Plans?
Chapter 13 repayment plans can push businesses and individuals to the limit financially. A repayment plan allows you to continue paying off your creditors over an extended period. It will usually give you up to five years to structure payments to your creditors.
Your attorney will review your income, debts, and expenses to help structure a repayment plan that works for you and your family. You can start by itemizing your current debts and establishing the amount of your monthly payments reflected in your plan.
Types of Debt a Repayment Plan Might Include
There are several types of repayment plans, including:
- Secured debts – A secured debt has been guaranteed by collateral. If you hope to retain possession of the property or assets in question, you must pay your secured debt payments as described in your repayment plan.
- Unsecured debts – Unsecured debt will be paid with your disposable income. This is the money you have left after paying off your secured debts, priority debts, and regular monthly living expenses.
- Priority debts – Priority debts must be paid in full and are the highest-level priority debt. These include tax debts, alimony arrears, and late or missing child support payments.
- Trustee fees – Chapter 13 bankruptcies require the use of a trustee. You can expect to spend up to 10% in trustee fees after declaring bankruptcy.
What If You Can’t Meet Repayment Plan Terms?
People sometimes enter a Chapter 13 repayment plan only to find out later their inability to meet the terms of their agreement. This happens when people fall on hard times or see a sudden decline in their income. Fortunately, there are several options available to you, such as:
- Requesting a Chapter 13 hardship discharge – The court may dismiss your outstanding debts and close your bankruptcy case. You must prove you are struggling financially to qualify.
- Modifying your payments – The court may reduce the amount of disposable income required from you to cover your unsecured debts.
- Switching to Chapter 7 bankruptcy – Here, you will lose possession of your non-exempt assets and property when your trustee sells it or lose the value of your non-exempt property.
- Dismissing your Chapter 13 bankruptcy petition – This means you’ll still be in debt to your creditors and lenders and could be further in debt due to interest rates that weren’t changed while your petition was being filed.
What Are the Pros & Cons of Chapter 13 Bankruptcy?
Declaring Chapter 13 bankruptcy may not be the best fit for everyone. However, there are many advantages and disadvantages you should discuss with your attorney to determine the right option for you.
Pros of Chapter 13 Bankruptcy
Some of the benefits of declaring Chapter 13 bankruptcy include:
- An automatic stay that prevents creditors from making further collection attempts
- Once you have met the terms of your repayment plan, unpaid debts will be discharged
- Your co-signer will be protected
- You do not have to worry about losing your property or assets
- Your attorney fees are paid through your repayment plan
- You can avoid repossession or foreclosure
- The opportunity to reschedule your secured debts and lower your payments
- The chance to consolidate your debts under one loan, as your trustee will distribute your payments to your creditors
- You can qualify for additional loans, including mortgages or auto loans
Cons of Chapter 13 Bankruptcy
While there are many benefits to a Chapter 13 bankruptcy declaration, there are also several disadvantages, such as:
- Your debt will remain in place for the length of your repayment plan
- Your credit report will take a hit
- Chapter 13 bankruptcy is expensive
- You may not meet the income requirements
- Your co-signer could be affected
- You may not qualify for lines of credit or loans for a minimum of two years
- You will be prohibited from declaring bankruptcy again for a minimum number of years
- Your bankruptcy declaration will be reflected on your credit report for up to 10 years
What is the Process for Filing Chapter 13 Bankruptcy?
To file for Chapter 13 bankruptcy, you should be prepared to follow these steps:
- Step 1: Contact an attorney for a free consultation – During your initial consultation, your attorney will go over your eligibility status and send documents for you to complete so they can prepare your bankruptcy petition. They will also obtain a copy of your credit report.
- Step 2: Go over your bankruptcy petition – Your lawyer can prepare your bankruptcy petition, but you need to provide them with the information they need to complete your petition. Once your petition is complete, they’ll file your bankruptcy shortly.
- Step 3: Meet with your creditors – Your attorney will be by your side as your bankruptcy trustee reviews your bankruptcy schedule and the proposed repayment plan. Your creditors could object to your repayment plan.
- Step 4: Your repayment plan is confirmed – This is where the court approves your repayment plan as long as creditors have not raised objections. You will then be expected to meet the terms of your repayment plan as described. Your creditors must also comply with the terms.
- Step 5: Your debts are discharged – Once you meet the terms of your plan, any remaining debts will be discharged, eliminated, and no longer outstanding.