When faced with overwhelming debts, your best option may be to file bankruptcy. In order to determine whether filing under Chapter 13 of the U.S. Bankruptcy Code would be the best option for your individual situation you should speak to a qualified bankruptcy attorney or financial advisor. They will highlight the advantages and disadvantages of such a decision and will also be able to explain the Chapter 13 discharge process.
Chapter 13 bankruptcy is a repayment plan that allows you to pay off at least a portion of your debts over a period of 3-5 years. It is designed for those who have sufficient disposable income to be able to make regular monthly payments to the court, either through the court-appointed trustee or buy having the amount deducted directly from your wages. There is an ‘automatic stay’ that accompanies a Chapter 13 filing, meaning that creditors must go through the courts to obtain their payment rather than filing a lawsuit, hiring collection agencies, or implementing wage garnishing; however, the debtor is still responsible to make the agreed-upon payments each month. It is an excellent way to obtain relief from overwhelming interest rates, late payment fees, and other monthly penalties.
Not everyone is eligible to file under Chapter 13, as you must prove that you have sufficient disposable income to cover the monthly payments towards your debts. This is calculated with a Means Test that also takes into consideration the average cost of living in your area. In addition, you must have unsecured debts less than $250,000 and secured debts less than $750,000.
If you qualify for filing personal bankruptcy under chapter 13, the process will be relatively straightforward and involve the following steps:
• Gather all financial information, including: expenses, debts, income, details of creditors, etc.
• Book an initial consultation with a qualified bankruptcy attorney.
• Fill out the required bankruptcy forms or hire a Bankruptcy Petition Preparer to assist you.
• Take the mandatory Credit Counselling course from an authorized provider and obtain certificate of completion.
• File your petition along with your repayment plan and course completion certificate at your local Federal Bankruptcy Court, and pay the filing fee of $274.
• Attend the 341 Meeting of Creditors to allow them to question your claim.
• Complete second mandatory Financial Management course and file certificate of completion with the court.
• Once the judge officially approves your plan, you will have 30 days to start making payments and must continue doing so until the plan is completed according to the pre-arranged terms.
The Chapter 13 discharge process does not require you to be involved in any additional steps. After you have completed making all the payments, according to your Chapter 13 repayment plan, you will receive your discharge. This is simply an official legal document issued by the court and signed by a judge that releases you from your remaining eligible debts, meaning that creditors cannot take action against you to try and recoup the remaining about owed to them. It is important to note that the Chapter 13 discharge process does not include the following debts:
• home mortgages
• child support
• alimony
• education loans
• certain back taxes
• recent cash advances or purchases on credit cards
• torts
• debts from death or personal injury due to driving while intoxicated or under the influence of drugs.
• debts for restitution or a criminal fine as a result of a conviction
Generally speaking, a Chapter 13 discharge can only take place once your payments are completed; however, there is such a thing as a Chapter 13 Hardship Discharge in which the courts wipe your remaining debts even though you failed to complete the payments of your plan. If you are unable to continue paying even a modified version of your repayment plan due to injury or illness that comes at no fault of your own, the judge may grant you a hardship discharge. This applies to any debts that are eligible for discharge under a Chapter 7 bankruptcy case.
While filing personal bankruptcy under Chapter 13 is a good way to consolidate your debts in a legal way and pay them off under the supervision and guidance of the court, it also offers the chance to pay only a fraction of the total amount owed to creditors. For those who find themselves overwhelmed with debt, a Chapter 13 bankruptcy can be very beneficial. In addition, at the end of the repayment period, any remaining eligible debts are wiped out as part of the Chapter 13 discharge process, leaving you with a clean financial slate and the opportunity to start again.
To learn more about Chapter 13 bankruptcy and to find out if bankruptcy is the right option for you, consider filling out our free bankruptcy evaluation.