Let’s Examine How Chapter 13 Bankruptcy Works
When people find themselves with an overwhelming amount of debt, and no clear way out, they begin to search for solutions. Frequently, they will determine that bankruptcy may be the best solution for their situation. Depending on your situation, there are basically two options for bankruptcy filing in Ohio: Chapter 7 and Chapter 13.
Chapter 7 bankruptcy is designed for debtors who have few assets and little income at the end of each month. This is the type of bankruptcy filing that discharges, or eliminates qualifying debt in as little as four months without requiring repayment to creditors.
Chapter 13 bankruptcy is meant for people who have regular income or wish to protect property from being foreclosed or repossessed. With this type of bankruptcy, debtors must establish a repayment plan through the bankruptcy trustee and approved by the court. Typically, the debtor’s disposable income (money left over after reasonable living expenses are paid) is used to pay into a three- to five-year repayment plan. The length of plan is determined by the debtor’s income.
Who is Eligible for Chapter 13 Bankruptcy?
Following are the requirements to qualify for Chapter 13 Bankruptcy in Ohio.
- Limits of Debt. There are established limits to the amount of secured and unsecured debt allowed in a Chapter 13 case. “Secured debt” uses an asset for security or collateral, such as a house or car, to ensure repayment of a loan; “unsecured debt” refers to debt like credit card bills, medical bills, and personal loans that do not include collateral. If your secured debts (mortgages and liens) or your unsecured debts exceed certain limits, Chapter 13 may not be available to you.
- Regular Income. Chapter 13 filing requires the debtor to prove they have the income to meet the monthly household obligations and payment into a repayment plan. Unfortunately, if you don’t have enough income, it’s unlikely the court will approve (or “confirm”) your proposed repayment plan.
Chapter 13 Process Overview
As you may know, properly filing a Chapter 13 bankruptcy case is extremely complicated; much more detailed than a Chapter 7 filing. It is highly recommended that you seek advice from a competent attorney who specializes in bankruptcy filing.
Following is an overview of the process.
Filing Fees and Mandatory Courses
Prior to filing a Chapter 13 bankruptcy, debtors must take an approved credit counseling course and present a certificate proving it. Fees for the course generally range from $20 to $35. You can find a list of approved credit counseling and debtor education agencies on the U.S. Trustee’s website, or visit our suggested course page. [LINK]
Debtors also must complete a second “debtor education” financial management course after filing their Chapter 13 case.
Fees for filing Chapter 13 bankruptcy in Ohio currently are $310, and may be paid in installments after filing your bankruptcy case. Fees must be paid on time or you risk your case getting dismissed by the court.
In addition to the filing fees, there are attorney fees involved in the complex process of filing Chapter 13. We request a retainer at the time of filing, and the total cost of representation is determined by the court.
The Chapter 13 Repayment Plan
The key component of the Chapter 13 bankruptcy case is the repayment plan we’ll propose to the trustee and creditors. The plan must consider all of your debt, and the type of each debt.
Both creditors and the bankruptcy trustee have an opportunity to object to your plan, beginning at the plan filing, during the 341 hearing (or meeting of creditors), and continuing until the plan is confirmed. Expect to get some pushback on all but the simplest plan filings. Most objections are fairly straightforward and, as your attorney, we’ll guide you through resolving any objections. Keep in mind that an objection does not mean your case is being dismissed or that it is failing, only that there are certain issues for your attorney to resolve.
Initial Payment into the Plan
The bankruptcy statues require that debtors pay full installments into their plan within 30 days of filing and every 30 days after. If you are employed, funds will be withheld from your pay and paid into the plan; self-employed individuals are allowed to make payments directly to the trustee. In any case, you are responsible to ensure those payments are complete and full by the deadlines.
Trustee Frank M. Pees
Dept 781158, PO Box 78000
Detroit, MI 48278-1158
Trustee Frank M. Pees
PO Box 1718
Memphis, TN 38101-1718
The Plan Confirmation Process
In a Chapter 13 reorganization, the bankruptcy trustee does not sell the debtor’s property but manages the intake of payments from the debtors and distributes funds to creditors in a prescribed priority order. Many Chapter 13 plans allow debtors to repay less than the amount owed on most unsecured debt.
Before the plan becomes official, the bankruptcy court must “confirm” or approve it. Creditors will have an opportunity to object before the hearing to any part of the plan that affects payment to them.
Once all objections are resolved, the bankruptcy judge will confirm the plan only if it meets the following criteria:
- the debtor must have enough income to pay the creditors as provided in the plan (and document that ability to repay)
- the debtor isn’t trying to take advantage or manipulate the bankruptcy process; the plan is proposed in good faith
- the plan complies with all applicable bankruptcy law
After the Chapter 13 plan is confirmed, the debtor must follow through and complete the three- to five-year repayment plan before any debt gets eliminated.
Given the complexity of filing and dealing with objections, representing yourself in a Chapter 13 case may not be a good idea. Most courts encourage filers to retain counsel.
Classification of Debt
Following are some of the types of debt that you’ll repay in a Chapter 13 bankruptcy plan.
- Priority Debt. Priority claims include domestic support obligations and arrearages, and most tax obligations. These must be paid in full.
- Secured Debt. If you’re behind in payments on any debt that was made with collateral, such as a home or car loan, those amounts must be repaid through the plan, as well as any current monthly obligations to the creditor. If you’re current on payments on secured debt, you may have the option of including it in the plan or paying it yourself outside the plan directly to the creditor.
- Unsecured Debt. Your repayment plan must take your disposable income (money left over after paying secured and priority debt, as well as ordinary living expenses) and apply it toward unsecured debt. In most cases, you only will have to repay a percentage of this debt and rarely in full.
Repayment plan length varies depending upon your income; many filers may require a five-year plan. A three-year plan is available to debtors who qualify for a Chapter 7 case but choose to file a Chapter 13, perhaps to prevent losing a home to foreclosure, a car to repossession, or get caught up on taxes or domestic support arrearages.
What Happens If You Can’t Make Plan Payments
Financial situations can change, often dramatically, during the course of a Chapter 13 plan. Because you suddenly can’t make payments, doesn’t mean your plan will be automatically cancelled.
If your income drops, for example, you may be able to modify the plan amount being paid to unsecured creditors. If your income loss is only short-term, you may be able to temporarily suspend your plan payments. In rare circumstances, if you can’t pay a required debt, the court may allow you to discharge certain debts due to a hardship. An example of a hardship might be a devastating illness that causes an inability to work.
If none of the previous options are do-able, it’s sometimes possible to convert a Chapter 13 plan to a Chapter 7 bankruptcy. Another option is to dismiss your Chapter 13 case; unfortunately you would still owe any outstanding debt.
How Does a Chapter 13 Case End?
Once you complete your Chapter 13 repayment plan, you must demonstrate to the court by way of a certificate that you’ve completed a debtor education financial management course (the second course you must take during the course of your Chapter 13 case) and that you are current on any domestic support obligations. If you meet all of the court’s requirements, any remaining balance on qualifying dischargeable debt gets eliminated. Typically, you would be debt-free except for a mortgage payment, student loans, and certain interest on tax debt.
Schedule your free consultation with David Bhaerman today to see if Chapter 7 or Chapter 13 bankruptcy can help you. Call 614-834-7110 or use the appointment request form on this page.