Chapter 13 Bankruptcy - Wage Earner Bankruptcy


Introduction

In simple terms, a Chapter 13 bankruptcy involves the reorganization of a debtor's financial affairs. The goal is to create a payment plan for the benefit of the creditors, while protecting the debtor from foreclosure, garnishment, levy, or similar consequences.

In order to qualify for Chapter 13 bankruptcy, the debtor must have an income that exceeds the debtor's reasonable living expenses, as it is necessary that the debtor have sufficient means to provide repayment to creditors of past debts. In some cases repayment may be for the full amount of the debt, while in others the debtor may pay off only a small percentage of certain debts - perhaps as little as ten percent.

Debtors must also meet with a credit counselor at some point during the six months prior to applying for bankruptcy, and must attend money management classes at their own expense before a final order will be issued by the bankruptcy court.

This form of bankruptcy is commonly referred to as a "wage earner plan".

A Chapter 13 bankruptcy will appear on your credit report for up to ten years.

Is Chapter 13 The Right Choice?

Most debtors will benefit from consulting with a qualified financial professional before considering a Chapter 13 filing, and create a list of obligations which will be subject to repayment under a Chapter 13 plan, and map out a possible budget. Some debtors will realize at that time that they cannot realistically live under that type of budget. Others may discover that they will be better served by trying to resolve their debts with their individual creditors outside of the bankruptcy process, as opposed to going through a formal bankruptcy.

The Chapter 13 bankruptcy tends to be favored by debtors who have fallen behind on secured loan payments, such as mortgages and car loans, as it enables the debtor to keep possession of the property while catching up on payments through a court-approved repayment plan. It may also be preferred by a debtor who has valuable non-exempt property that would be liquidated in the course of a Chapter 7 bankruptcy.

Some debtors will choose not to file for Chapter 13 bankruptcy, as they do not wish to live under the scrutiny of the bankruptcy court which will result from a successful petition. Many debtors lack the discipline to abide by a Chapter 13 repayment plan. Only about 35% of debtors successfully complete their plans. If you do not think that you can live under the plan's budget, you may wish to reconsider a Chapter 13 filing.

Due to reforms in bankruptcy law, effective in October, 2005, many debtors are disqualified from filing for Chapter 7 bankruptcy protection, and thus will have to file for Chapter 13 protection. If the debtor earns in excess of the state median income, and is able to repay 25% of his or her "nonpriority unsecured debt", the debtor will be ineligible for Chapter 7 protection and must proceed under Chapter 13.

The Automatic Stay

Once a debtor files for bankruptcy, the debtor's estate is protected by the "automatic stay", which bars creditors from trying to collect debts without the permission of the bankruptcy court. This provides immediate protection against foreclosure, repossession of your car, eviction from your apartment, garnishment of your wages or bank accounts, cut off your electricity, or other measures creditors may take to try to recover monies owed.

The Chapter 13 Bankruptcy Process

After filing for Chapter 13 protection, a debtor will propose a repayment plan for any debts and obligations. The proposal will be reviewed by a bankruptcy court. If the plan is approved, the court will appoint a trustee to collect the debtor's payments, to distribute them to creditors, and to supervise the debtor's compliance with the court-approved repayment plan. The debtor will be required to pay the trustee's fee.

During the repayment period, the bankruptcy trustee will have control over the debtor's personal finances, and the debtor must submit any credit-related matters to the trustee for review and approval.

The repayment period typically lasts from three to five years. During this time, the bankruptcy court will not permit the debtor to spend money on anything it deems "nonessential", and the debtor will have to live under a strict, court-imposed budget.

Dismissal of the Petition

Some persons who file for Chapter 13 bankruptcy protection simply wish to buy some time in order to prevent a foreclosure, or repossession of a vehicle. If the debtor is able to regain firm financial footing before the bankruptcy is resolved, the debtor may opt to petition for discharge of the bankruptcy petition and then to pay off the arrearages in full. In the alternative, a debtor may use the time to sell certain property, such as a house, prior to foreclosure or repossession, as foreclosure sales often do not result in the recovery of full market value.

Summary

In a "Chapter 13" Bankruptcy:

  • You will propose a repayment plan for your debts;

  • If approved by the court, a trustee will be appointed to collect your payments, distribute them to your creditors, and to supervise your compliance with the repayment plan.

  • You will have to pay the trustee's fee, which can be substantial.

Debtors whose debts exceed certain limits are barred from seeking Chapter 13 bankruptcy. (At the time of this writing, in order to file a "Chapter 13" bankruptcy, you must owe less than $871,550 in noncontingent, liquidated, unsecured debts, and less than $807,750 in noncontingent, liquidated, secured debts. You will most likely be unable to file a "Chapter 13" bankruptcy if you have filed and dismissed a "Chapter 13" petition in the last 180 days, and should discuss any prior filing with your attorney. You should also take care to propose a reasonable budget, as most debtors find themselves unable to comply with the strict enforcement of their "Chapter 13" plans, and end up dropping out of bankruptcy before their plan is completed.

This type of bankruptcy can be particularly useful when a debtor believes that his financial crisis is temporary, and that his income will continue to grow in the future. Corporations and partnerships cannot file a "Chapter 13" bankruptcy.

Copyright © 2005 Aaron Larson, All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you use a quotation, excerpt or paraphrase of this article, except as otherwise authorized in writing by the author of the article you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.

This article was first published on Apr 1, 2005, and was last reviewed or amended on Sep 10, 2014.