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What is Bankruptcy?
A. Bankruptcy
Bankruptcy is a federal court process designed
to help consumers and businesses eliminate their debts or
repay them under the protection of the bankruptcy court.
Bankruptcies can generally be described as "liquidations"
or "reorganizations." Chapter 7 bankruptcy is
the liquidation variety -- property is sold (liquidated)
to pay off as much of the debtor’s debt as possible, while
leaving them with enough property to make a fresh start.
Chapter 13 is the most common type of "reorganization"
bankruptcy for consumers – the debtor repays his or her
debts over three to five years. Both kinds of bankruptcy
have numerous rules -- and exceptions to those rules --
about what kinds of debts are covered, who can file, and
what property the debtor can and cannot keep.
C.
An Overview of Chapter 13 Bankruptcy
1. The basic steps involved in a typical Chapter 13 case.
Chapter 13 bankruptcy, sometimes called
the wage earner's plan, or reorganization bankruptcy, is
quite different from Chapter 7 bankruptcy. In a Chapter
13 bankruptcy, the debtor uses their income to pay some
or all of their debts to their creditors over time -- anywhere
from three to five years, depending on the amount of the
debtor’s income and the size of their debts.
Chapter 13 bankruptcy isn't for everyone.
Because Chapter 13 requires the debtor to use his or her
income to repay some or all of their debt, the debtor must
prove to the court he or she can afford to meet all of your
payment obligations. If the income is irregular or too low,
the court might not allow the debtor to file for Chapter
13.
If your total debt burden is too high, you
are also ineligible. Your secured debts cannot exceed $922,975,
and your unsecured debts cannot be more than $307,675.
2. The Chapter 13 Process
Before filing for bankruptcy, a debtor must receive credit
counseling from an agency approved by the United States
Trustee's office. These agencies are allowed to charge a
fee for their services, but they must provide counseling
free or at reduced rates if you cannot afford to pay.
After a debtor completes credit counseling,
they receive a certificate of completion. To begin your
bankruptcy case, a debtor must file this certificate with
the bankruptcy court, along with a packet of forms listing
what he or she owns, earns, owes, and spends. The debtor(s)
must also submit their Federal and State Income Tax returns
for the preceding three-years. The court’s filing fee is
$189.00.
3. The Chapter 13 Repayment Plan
This form is the most important paper in the entire Chapter
13 bankruptcy case. It describes in detail how (and how
much) you will repay each of your debts
4.Making Payments on the Repayment Plan
The Debtor must begin making payments under the Chapter
13 repayment plan within 30 days after filing it with the
bankruptcy court. Usually, you make payments directly to
the bankruptcy trustee (the person appointed by the court
to oversee your case). Once your repayment plan is confirmed,
the trustee will distribute the money to your creditors.
If a debtor has a regular job with regular income, the bankruptcy
court may order that the monthly payments be automatically
deducted from the debtor’s wages and sent directly to the
bankruptcy court.
5. How Much You Must Pay
A debtor’s Chapter 13 plan must pay certain debts in full.
These debts, which include child support and alimony, wages
you owe to employees, and certain tax obligations, are called
"priority debts," because they're considered sufficiently
important to jump to the head of the bankruptcy repayment
line. In addition, the plan must include a debtor’s regular
payments on secured debts, such as a car loan or mortgage,
as well as repayment of any arrearages on the debts. The
plan must show that any disposable income a debtor has left
after making these required payments will go towards repaying
the unsecured debts, such as credit card or medical bills.
A debtor doesn’t have to repay these debts in full (or at
all, in some cases); they just have to show that they are
putting any remaining income towards their repayment. Under
the new law, a debtor must pay a minimum of $100 per month
for five years or 25% of their total unsecured debts, whichever
is greater.
5.How Long The Plan Will Last
The length of your repayment plan depends on how much you
earn and how much you owe. If your average monthly income
over the six months prior to the date you filed for bankruptcy
is higher than the median income for your state, you'll
have to propose a five-year plan. If your income is lower
than the median, you may propose a three-year plan.
