Wage earners with sufficient disposable income, who are current on their Federal and State income tax returns, and whose debts are within the stated maximum, can file for Chapter 13 bankruptcy.
Filing for bankruptcy is advisable when a debtor is unable to settle claims of the creditors. It’s important to note that filing for bankruptcy prohibits the creditors from suing the debtor and obtaining a writ permitting wage garnishment. However, any garnishments in lieu of student loans and unpaid taxes will hold regardless of a person having filed for bankruptcy. Again, obligations like child support and alimony cannot be requited. The following information on Chapter 13 bankruptcy may be of use to those who are left with no better alternative.
Eligibility and Repayment
Filing for Chapter 13 results in the petitioner having to discharge debts over a period of 3 to 5 years, in accordance with a repayment plan that is worked out by the trustee, after the debtor is questioned in the presence of creditors about his/her financial affairs. The debtor is expected to have sought credit counseling within 180 days, prior to filing for bankruptcy. Petitioners also need to be current on their Federal and State income tax returns.
The proposed repayment plan is worked out after taking into account the income, expenditure, and debts of the petitioner. The total amount of unsecured and secured debts cannot exceed $336,900 and $1,010,650, respectively. This plan has to be presented in front of the trustee and the creditors. The bankruptcy court approves or disapproves the plan within 45 days of this meeting. The debtor needs to start making payments to the creditors within 30 days of filing bankruptcy, irrespective of whether the court has approved the repayment plan.
Since Chapter 13 is a wage earner’s plan, the petitioner is expected to have a steady source of income. People may use their spouse’s income, regardless of whether they are filing individually or jointly. Typically, petitioners use their salary to pay off creditors. Petitioners are also entitled to use their social security benefits, pension, unemployment compensation, alimony, and child support to make the requisite payments.
Claims that can be classified as priority, secured, and unsecured, have to be discharged within a period of 5 years. Secured and priority debts are settled in full, but as far as unsecured debts are concerned, the creditor may not recover more than 50% of the dues.
Filing for bankruptcy affects a person’s credit score and may lower it by as much as 400 points. Filing under Chapter 13 stays on record for at least 7 years. People also find it distinctly difficult to obtain a mortgage loan after bankruptcy. In fact, Federal Housing Administration (FHA) insured loans and Veterans Administration (VA) insured loans may be their best bet. The latter is available to eligible veterans after 2 years of filing for Chapter 13, while the former is made available, provided the petitioner makes 12 consecutive payments on all accounts from the date of filing.
It is evident that declaring bankruptcy has a number of negative consequences. Still, Chapter 13 bankruptcy indicates the ability of a person to adhere to a repayment schedule, and hence, is a better alternative than Chapter 7. The latter absolves one of the responsibility of repaying debts, but the repercussions are worse.