Chapter 13 Bankruptcy: Wage Earner’s Reorganization

Chapter 13 Bankruptcy is known as a wage earner’s bankruptcy, as it requires the debtor to have consistent and reliable income. A Chapter 13 bankruptcy is a reorganization of your debt and requires a payment to the Chapter 13 Trustee every month over a period of time from 3 to 5 years. In a Chapter 13 bankruptcy, you must pay back 100% of the debt owed to some of your secured creditors and only a small percentage to your unsecured creditors. The remaining balance owed to your unsecured creditors is discharged upon completion of your Chapter 13 plan, giving you a fresh start. In Chapter 13, unlike Chapter 7, you may keep all of your property as long as you continue to make payments under your payment plan.

In a Chapter 13 bankruptcy, you and your attorney create a Chapter 13 plan. The Chapter 13 plan determines the amount that you can afford to pay every month, and where those funds go. To determine what you can afford for your monthly payment to the trustee, you and your attorney establish what your monthly income and expenses are and how much you have left over every month. Then, your attorney will determine how much you have to pay in. Your disposable monthly income and the amount of debt you owe together determine how long it will take to complete your Chapter 13 plan. If you have a high income, you will have to be in a Chapter 13 bankruptcy for close to 5 years.

Eligibility

To be eligible for a Chapter 13 bankruptcy, the debtor must show that they have consistent and reliable income sufficient to pay both their everyday living expenses and the monthly payment to the Chapter 13 Trustee.

Some Advantages to Filing Chapter 13

A Chapter 13 may discharge a number of unsecured debts as well as allow you 3-5 years to pay back arrearages on secured debts such as a mortgage and property tax and pay back unsecured tax debt, interest free and penalty free.

Arrearages on a Mortgage/Home in Foreclosure.
One of the main reasons for choosing a Chapter 13 over a Chapter 7 bankruptcy is to save your home from foreclosure. If you are behind on your mortgage payments, a Chapter 13 bankruptcy will allow you 3-5 years to catch up or pay back arrearages on your home. A Chapter 13 will also stop a foreclosure, up to the auction date, and allow you 3 to 5 years to pay back your arrearages. Over the life of the bankruptcy, you must make your monthly mortgage payments outside of the bankruptcy and pay enough into your Chapter 13 bankruptcy to pay back what you already owe on your home.

Property Tax Debt
Similar to your mortgage, any past due property tax debt can be paid over your Chapter 13 bankruptcy. You must also keep current with new property tax outside of the bankruptcy.

Tax Debt
Income tax debt owed to the Internal Revenue Service or Maine Revenue Service from the last (3 years) that is not secured can be paid off through a Chapter 13 bankruptcy (without interest or penalty). If the tax debt is secured by a lien on your property, you will have to pay interest on the amount owed, but no penalties.

Property Settlement Debt
In a divorce, debt assignment or payments ordered that can be classified as property settlement debt are discharged in a Chapter 13 bankruptcy.

The Automatic Stay

The automatic stay starts the day that you file your bankruptcy. This means that your creditors must cease all collection actions against you. This includes collection letters, phone calls and lawsuits. Any garnishments or court ordered payments on unsecured debt will also stop.

There are exceptions to the automatic stay: some domestic support proceedings including actions for child support or custody. Your attorney can explain this in more detail.