Chapter 13

August 6, 2017

Chapter 13 Bankruptcy

Many individuals find themselves unable to keep up with their debt payments and seek relief through the nation's bankruptcy courts. Some of the individuals appeal for a discharge of most of their debts, Chapter 7 bankruptcy. Other individuals reorganize their debts and pay a portion of what they own each creditor, Chapter 13 bankruptcy.

Don't think of bankruptcy as a major failure, think of it as a necessary financial move to get your debt under control.


Chapter 13 Explained:

Chapter 13 bankruptcy is really a petition to pay off some of the debt you owe and be relieved of the balance. A Chapter 13 bankruptcy obligates you to pay off part of your debt over three to five years. The exact percentage that has to be paid could be anywhere from 5% to 20%, sometimes more and rarely less. What percentage of the debt you have to pay over what time frame will depend on what you and your bankruptcy attorney decide is realistic. The bankruptcy court will then assign you a legally binding payment plan if it accepts your payment plan. Preparing to submit an accurate accounting of your expenses, budget, and debt is the biggest part of filing for Chapter 13.


How to Get Ready:

You will be expected to provide a detailed accounting of your debts, income, assets, and spending. The petition for bankruptcy will ask for a budget breakdown similar to the household budget many people keep. You will also need to estimate the value of important assets like retirement accounts, checking and savings accounts, cars, your primary residence, furnishings, and so on. For example, if you own undeveloped land or receive income from child support or from intellectual property like a book, this must be reported.

The petition paperwork will include worksheets for reporting your budget, assets, and expenses. It is up to you and your attorney to make sure the numbers are accurate and the listings are complete.

Finally, and most importantly, you must list each creditor, their contact information, and the amount owed. If you forget someone, you may have a limited amount of time after your bankruptcy hearing to make the court aware of this additional creditor. Any other failure to report each creditor would leave you owing the full amount to them.

The filing process is complicated and involves navigating a variety of legal details. You may be able to handle everything yourself, but many petitioners prefer to work with a New York bankruptcy attorney.


How The Process works:

You or your attorney will submit the petition paperwork and a filing fee to the New York Bankruptcy Court. The $281 fee cannot be waived or reduced, but you can choose to pay installments.

Your petition will be turned over to a bankruptcy trustee, who will notify you of a hearing date. If you do not attend the hearing and answer some questions about your financial situation, your petition will be dismissed. You will once again owe each creditor the full amount. After the meeting any correspondence will come from the bankruptcy trustee. In general, people who are in Chapter 13 set up an automated payment schedule that debits the agreed-to amount from their account.

When your petition is approved, you are legally bound to keep up with your payments to the bankruptcy trustee. A debtor can only be excused for missing a payment in extraordinary circumstances. If you miss a payment you will have to pay back the original amount you owed to each creditor. Ask a bankruptcy attorney how to proceed as soon as it becomes clear the new payment plan is a problem.

In Chapter 13, your creditors have the right to challenge your petition for bankruptcy. In practice, this rarely happens with consumer bankruptcy cases unless the debt is large or suspicious in some way. For example, running up a huge credit card bill before filing will cause that debt holder to contest your petition. The bankruptcy judge may question a filing if there is something highly irregular, but this is also unusual. If you haven't made obvious attempts to run up debt or hide income or assets, your Chapter 13 petition is likely to be approved.

Some individuals in Chapter 13 have additional obligations while they are on their payment plan. No one in Chapter 13 may take on more debt without the bankruptcy court's permission. Anyone who is self-employed will be required to attend a tax reporting and bookkeeping workshop within a set time after their hearing.

You cannot take on new debt while you are on a payment plan, unless you have the trustee's permission. Credit would be hard to obtain under Chapter 13, and taking on unsecured debt is out of the question. If it is possible to get credit, to buy a used car for example, you must present a justification for doing this to the bankruptcy trustee.


Debts not Affected:

As with Chapter 7, some categories of debt are not affected. Unlike Chapter 7, in Chapter 13 you can get a reduction in your federal tax debt. Ask your attorney if your unpaid property taxes or state income taxes are affected. In general, these debts cannot be reduced by Chapter 13 bankruptcy:

  • Child support and alimony
  • Student loans
  • Criminal fines and restitution payments
  • Drunk driving liabilities
  • Some long-term debt that extends beyond the repayment period
  • Liens on your mortgage
  • While you can defer student loan payments in bankruptcy, you will eventually have to pay the full loan amounts. If your mortgage period extends beyond the next five years, you will not be able to reduce the payments through Chapter 13. Finally, you may have some relief from mortgage payments while in Chapter 13, and the mortgage lender may not start or continue foreclosure proceedings while you are in Chapter 13.

    Attorney Katz can be reached at (800) 251-3529