What is Chapter 13?
Chapter 13 is one of the reorganization provisions of the bankruptcy law that allows individuals and single owner businesses to repay their debts and keep their assets, all without conflict or interference from the creditors.
This repayment is made from future income and is primarily determined by the amount the debtor can afford to pay. The repayment amount is arrived at by finding out how much is required for meeting reasonable and necessary business and living expenses. This amount is subtracted from your income. The amount left over is the amount you can afford to pay on your debts. All of your debts are consolidated so you make a monthly payment to a trustee and the trustee disburses the money to your creditors. So in the sense that you have to make only one payment to satisfy all of your creditors, Chapter 13 is like a debt consolidation.
To qualify for Chapter 13 you must have enough income to first meet your expenses and then have enough left over to make a meaningful payment to the trustee to pay your debts.
The ideal time to pay debts is 36 months, but you can take longer to pay if necessary, but no longer than 60 months.
The purpose in Chapter 13 is to keep all of your assets. The reason is that you will be paying your debts, in full if possible, but a least to the extent of your ability to repay.
While in Chapter 13 your creditors must accept payments from the trustee and cannot contact you or in any manner attempt to collect their debt from you.
If you cannot afford to repay all of your debts within the 60 months allowed for repayment, you will be eligible to consider what is called a composition Chapter 13 plan of repayment. It is also referred to as a “best effort” or “partial” plan of repayment. The idea here is to repay what you can afford to pay within a 60 month period and upon completion of those payments, any remaining unpaid debts are discharged – that is they do not have to be repaid. This is a Chapter 13 proceeding, but it is like both a Chapter 13 and a Chapter 7. It is like Chapter 13 in that you repay your debts, at least to the extent of your ability to repay, and like Chapter 7 in that there is debt forgiveness involved.
As in Chapter 7, any debt that is non-dischargeable in Chapter 13 could survive the Chapter 13 composition plan.
In chapter 13, your monthly payments can usually be reduced drastically and beyond your expectations. Do not hesitate to inquire about the relief available in Chapter 13 just because you feel there is no hope, and even if credit counselling services and the like are not able to offer adequate relief. Explore the possibilities!
What about my car and assets?
When you fail to pay a debt for the purchase of a car, furniture, appliances, jewelry, electronics, or other personal items and the seller has retained a lien or security interest against the purchased item, the creditor can repossess the item. The item will then be sold and the proceeds applied against the debt. If a balance still remains, which is usually the case, the creditor can pursue collection of this remaining balance. This is the situation where you are paying a large debt for the car you don’t have.
All of this can be avoided if you repay your debts in Chapter 13. The purpose of Chapter 13 is to allow you to keep all of your assets and pay for them at a rate you can afford.
A new set of rules for repayment comes into play once you file for Chapter 13. Bankruptcy rules replace contract rules. You can think of Chapter 13 as refinancing all of your debts into a debt consolidation that requires only one monthly payment to satisfy all debts.
And this is true even if you are seriously behind in your monthly payments – lawsuits have been filed – judgments taken – IRS levies in place – house in foreclosure. All can be saved if you qualify for Chapter 13.
What about the IRS?
Chapter 13 allows you to repay your taxes over a period of time not to exceed 5 years and at a rate you can afford. It is probably the only way you can repay taxes under YOUR terms rather than the terms imposed by the IRS.
If a tax is non-dischargeable in Chapter 7, with some exceptions, the Chapter 13 must provide for full payment of such taxes, or as otherwise agreed by the taxing authority.
If you are in a composition Chapter 13 – one where you cannot repay your debts in full – upon completion of Chapter 13 your remaining dischargeable debts are forgiven as in a Chapter 7. As you can see, this is a complex and confusing subject and you should consult an attorney to determine how the law applies to your situation.