Bankruptcy Basics: Filing for Chapter 13
Chapter 13 is sometimes called the “wage earners” or “reorganization” bankruptcy. It is designed primarily for people with a regular income who may have fallen behind on their debt payments, and people who do not qualify for chapter 7 bankruptcy. In chapter 13, individuals work with a credit counselor and their attorney to develop a plan which allows them to restructure the timing of payments of most of their debts over a 3-5 year period. The debtor’s disposable net income (DNI) is used to cover a portion of their debts; this is the amount left over after all of the debtor’s monthly bills are paid. Once the debtor makes payments for 3-5 years, most remaining debts are discharged. There is no income qualification test for chapter 13, but unsecured debt must be less than $394,725 and secured debt less than $1,184,200 (these numbers are adjusted periodically).
The biggest advantage of chapter 13 is that it can prevent foreclosure and loss of home. The debtor continues to earn a regular paycheck and is able to eliminate some debts (medical bills, credit card debt) while getting caught up with past due mortgage payments. Debtors may still lose their home, however, if their mortgage company completes a foreclosure sale before the debtor’s bankruptcy petition is filed, or if the debtor does not make the mortgage payments which fall due after the petition date. Another advantage of chapter 13 is that it protects co-signers and prevents debtors from having to deal personally with their creditors.
The chapter 13 process begins with credit counseling for the debtor with an approved agency, at least 180 days prior to filing the bankruptcy petition. A payment schedule will be determined, which is submitted at the time of petition or within 14 days, along with documentation and required fees. The documentation will include lists of creditors, assets, liabilities, monthly expenditures, contracts, etc. The debtor may arrange to pay the required fees in up to four installments.
Once the petition is filed, a trustee is appointed who will oversee the process, collect DNI from the debtor, and distribute monies to creditors in a structured and timely fashion. At this point a “stay” is put in place which stops home foreclosure and prevents creditors from suing, garnishing wages, or making harassing phone calls to the debtor. The trustee will arrange for a meeting with the creditors within 21-50 days of petition; the debtor must be present to answer questions. Then a hearing is held before a judge, who will determine whether the payment plan is feasible and follows the stipulations of the bankruptcy code.
Payments of DNI to the trustee must begin within 30 days of filing for bankruptcy. Following the payment schedule, payments are made biweekly or monthly to the trustee (payroll deduction may be used), who then pays the creditors. The first claims paid by the trustee cover most taxes and the cost of the bankruptcy proceedings. They then pay the holders of secured debts, followed by unsecured debts. Creditors may receive less than what they are actually owed.
The final step of chapter 13 is the discharge, or erasure, of most remaining debts. Generally long-term debts cannot be discharged through chapter 13, such as mortgage, child support, student loans, or restitution owed for personal injury or death caused by DUI. The discharge rules for chapter 13 have recently undergone revision, and are more complex than the chapter 7 statutes.
An experienced bankruptcy attorney can help you navigate the nuances of the bankruptcy code to determine whether chapter 13 is the best solution for your financial situation. A free, 30-minute introductory appointment is available from the Law Office of Erik Severino at (702) 997-4149. Your case will be handled with his personal attention and his commitment to provide you with resolution, protection, and integrity in the process. Erik Severino has a degree in economics from the University of Nevada, Las Vegas, and his Juris Doctorate from the William S. Boyd School of Law, UNLV. He has been licensed to practice in Nevada since 2006, concentrated exclusively on consumer bankruptcy law since 2009, and in 2016 was awarded the Avvo Clients’ Choice Award.