1. What is Chapter 13 bankruptcy? Chapter 13 bankruptcy is a plan to reorganize and restructure all debts to be paid at an affordable monthly payment and managed by a court-appointed trustee. The payments are to be paid over a period of 3-5 years. A discharge of Chapter 13 is given upon satisfaction of debts being paid at the end of the plan.
2. Who is eligible for Chapter 13 bankruptcy? Usually, a Chapter 13 bankruptcy is best suited for debtors that still have significant income and can afford to make payments to re-establish their credit. Qualification for a Chapter 13 bankruptcy requires debtors passing a means test. This test compares to the incomes of families of the same size and in the same state. In order to pass, a debtor’s income must fall below the median incomes of families in the same state. See the IRS Local Standards: Housing and Utilities.
3. Can I keep my house if I file Chapter 13 bankruptcy? Yes. A Chapter 13 bankruptcy is the preferable choice when trying to save your home or stop a foreclosure. Filing a chapter 13 will protect your home from a sale for the period in which the automatic stay is in place. Although a Chapter 7 or 13 will halt all foreclosure proceedings, re-establishing your credit and continuing to make payments on your home will be helpful to you and the lender.
4. What is a non-exempt asset? A non-exempt asset is a tangible or intangible property that is sold by the court to satisfy any outstanding and delinquent debts to the benefit of the creditor. When an asset is greater than the federal or state’s allowed exemption amount it may become the following non-exempt asset.
- Cash, bank accounts, stocks, bonds, and other investments
- Family heirlooms
- Collections of stamps, coins and other valuable items
- A second car or truck
- Vacation home or second home
- Expensive musical instruments, unless it’s the debtors tools of trade
5. What is an exempt asset? Exempt assets are tangible/intangible personal property that the debtor may keep up to a certain value according to federal/state’s exemption laws: (Be sure to check your states bankruptcy laws)
- Household appliances and furnishings
- Jewelry, up to a certain value
- Autos, up to a certain value
- Real estate, portion of excess equity
- Pensions and Retirement Accounts
- Life insurance
- Public assistance
- Social security
- Unemployment compensation
- Tools of the trade
6. What debts can I eliminate when I file a Chapter 13? A chapter 13 bankruptcy will not eliminate debts. All debts will be re-structured to be paid off includes mortgages, credit cards, personal secured loans, child support payments, alimony, some medical, student loans, taxes, and criminal fines. However, a discharge can be granted even if all debts have not been paid in full.
7. Do I need a bankruptcy lawyer? The bankruptcy laws are not what they use to be. Bankruptcy laws changed in 2005 and are now known as the Bankruptcy Abuse Prevention and Consumer Protect Act (BAPCPA). Filing for bankruptcy requires much more paperwork and meeting strict guidelines. Although it is not required to hire an attorney, it is advised to acquire the services of a competent bankruptcy attorney. A bankruptcy attorney provides the court-appointed trustee with all necessary paperwork in preparation for the 341 Meeting of Creditors that they will attend with the debtor. In addition, an attorney may need to prepare and file reaffirmation agreements which will permit the debtor to keep secured assets, such as a home or car.
8. What is a 341 meeting? One month after a bankruptcy has been filed a 341 Meeting of Creditors is scheduled to review the debtors income and assets. The trustee, attorney, debtor and any/all creditors are invited to attend. Most of the time, creditors will not attend. The trustee will conduct the meeting by asking questions related to the statement of financial affairs, previous bankruptcies, current filing of tax returns, mortgages and other assets, transfers of any property, life insurance, medical bills and the list goes on and on. Overall, the meeting will be very short and in most cases will not last longer than 30 minutes (most end in about 5 minutes).
9. Do I make too much money to qualify for a bankruptcy? The federal government has never required income limits on filing a bankruptcy. However, with the passage of the 2005 BAPCPA law, it clearly states that debtors with significant income and are above the state median income will not qualify for a Chapter 7 and must enter into a Chapter 13 bankruptcy.
10. Do I need to pass the median test to qualify for a Chapter 13 bankruptcy? Typically to qualify for a Chapter 13 bankruptcy a debtor must pass the median test. Since 2005 the BAPCPA laws were specifically designed to prevent debtors with significant incomes and have the ability to pay off their debt to utilize Chapter 13.
11. What is the means test? The means test is a formula used to establish the median income level of a debtor in comparison to other families of the same size and living in the same state. If the income is lower than the median income, then the debtor will pass. Conversely, if it is higher than the median income, then the debtor will not be allowed to file a Chapter 7 instead they must file a Chapter 13. With the advent of the BAPCPA, the means test was implemented to prevent high income individuals (who could pay off their debts) from filing a Chapter 7 bankruptcy.
12. What is an unsecured debt? An unsecured debt is a liability that is not used as collateral for a security on a loan. Credit cards, medical bills, payday loans are unsecured debts.
13. What is a secured debt? A secured debt is an asset that is attached to a tangible or intangible asset to be used as collateral for payment of a debt. Example: home, car, boat, cash, etc.
14. What is a redemption agreement? In your Schedule D – Creditors Holding Secured Claims the debtor will have to indicate what they want to do with a secured property. If the debtor elects to redeem the property, then a redemption agreement between the creditor and debtor is made agreeing to pay off a secured debt for less than what is owed. Ex: A car loan balance of $10,000, current value is $7,000 the debtor redeems the car for $7,000 or less. A redemption agreement is not mandatory, the debtor has 2 other options that can be chosen 1) surrender the property 2) reaffirmation agreement – making timely payments.
15. What is a reaffirmation agreement? A reaffirmation agreement is another option that the debtor may elect should they decide to keep the secured property. To reaffirm a debt the debtor and the creditor enter into a reaffirmation agreement in which the debtor promises to continue to make monthly payments to retain the property. The only time a reaffirmation agreement may not be approved is if the courts feel that it presents an undue hardship on the debtor.
16. What is the purpose of a bankruptcy trustee in a Chapter 13? A bankruptcy trustee will be appointed by the federal court to handle and manage the debtor’s estate. In essence the debtors estate is legally under the control of the bankruptcy trustee. The trustee will review the creditors claims, investigates the assets of the debtor, collects proof of insurance, collects payments and attends the 341 Meeting of the Creditors.
17. How long does it take to file bankruptcy? If the debtor and attorney are both organized and available to fulfill the requirements of the Chapter 13 bankruptcy, it can be filed almost immediately. It is best to prepare well in advance of deadlines, such as a foreclosure. A bankruptcy can and will be stopped by an “automatic stay” from the courts.
18. How long does Chapter 13 bankruptcy last? In most cases, the Chapter 13 process will take 3-5 years before a discharge is filed. However, consult with your attorney to find the exact process.
19. Must I include all my bills when I file bankruptcy? All debts must be included when filing a Chapter 13 bankruptcy. Should you wish to keep some of your debts, such as a car loan, then you must reaffirm with the creditor and continue to make payments.
20. Can I add debts that I forgot after I file for bankruptcy? As long as your bankruptcy case remains open, you may add creditors to your case.
21. Will filing a Chapter 13 bankruptcy hurt my credit? A Chapter 13 bankruptcy will have a negative effect on your credit report and FICO score. The impact to your credit score is almost impossible to predict. However, the impact of a Chapter 13 bankruptcy is less severe than a discharged Chapter 7. If your scores were high prior to the bankruptcy (such as 750-800) then your score may be lowered by 15-75 points according to FICO (varies depending on creditors) A Chapter 13 bankruptcy will remain on your credit 7-10 years. Even though the derogatory blemish remains on your credit for a long time, you will be able to recuperate in 2-3 years once you have re-established your credit.
22. How often can I file a Chapter 13 bankruptcy? You can file a Chapter 13 bankruptcy every 2 years to receive a full discharge. In principle, a chapter 13 bankruptcy can be filed as often as you like but a Chapter 13 filed prior to the 2 year previous Chapter 13 bankruptcy will not be discharged. Consult with your attorney to learn the specifics of the laws.
23. How much does Chapter 13 bankruptcy cost? Bankruptcy costs vary depending on the complexity of each case. Generally speaking and depending on the state you live in, costs can be as low as $1,500.00 or will start at approximately $300 for court costs and attorneys fees start at $3,000 and work their way up. Attorneys fees are public record and must be disclosed in a bankruptcy filing listed on the Statement of Financial Affairs #9. You may visit the federal PACER website to do a party search. In addition, you are required to take a credit counseling and personal financial management course prior to the discharge of a bankruptcy. The costs are typically $50-$100 depending on the location. Consult with your attorney regarding fees. LEGAL ADVICE The author is not an attorney and is not rendering legal, financial, or other professional services. The information contained on this web site is the authors opinion based on her personal experience. If you need legal advice, consult a competent attorney.