What is Chapter 13 bankruptcy?
Chapter 13 bankruptcy is a commonly filed bankruptcy by individuals whose income is too high to qualify for Chapter 7 bankruptcy. In Chapter 13, a debtor is able to keep most of their property but the debtor is required to pay back their debt over a 3-5 year repayment plan. Chapter 13 bankruptcy is often called “reorganization” versus Chapter 7, which is a “fresh start”.
Chapter 13 is an interesting form of bankruptcy because it is reserved for those that make more than the maximum income to file Chapter 7 but you also have to prove to the court that you have enough money to be able to meet your payment plan obligations that have been created in the bankruptcy plan. This is one reason that there are limits placed on the amount of debt that you can have when you file Chapter 13. As of 2014, your secured debts cannot exceed $1,149,525 and your unsecured debts cannot be more than $383,175.
Your Chapter 13 will involve a repayment plan that is designed to have you pay back your debt based on priority. These priority debts will be paid in full and will be paid first through the payments you make in the plan. Examples of priority debts are child support, alimony and taxes. Furthermore, the plan will include your regular payments on your secured debts such as your mortgage and your car. Last, your unsecured creditors will get paid back via any plan payment proceeds that are left after the priority and secured debts are paid. These debts may or may not get paid back in full by the end of the plan.
Chapter 13 requires that all of your disposable income be paid to the Chapter 13 Trustee to pay your debts. If your income increases (you are required to report annual income to the trustee during your plan), then your Chapter 13 plan payments increase. If you get a tax refund, it belongs to the Chapter 13 Trustee to use. If, at some point over the 3-5 year plan you are no longer able to keep up with the payments, the bankruptcy court may modify your plan to a lower payment. If you are unable to modify your plan you may be able to convert your plan to a Chapter 7, or perhaps debt settlement would be the best route for you at that point. Lastly, if your income does increase, you may want to consider debt settlement, as well, since you would be able to keep more of your disposable income than if you were in a Chapter 13.
In a Chapter 13, once you complete your 3-5 year repayment plan, your remaining debt that is a part of the bankruptcy plan will be discharged and forgiven without tax consequences.