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Chapter 13 Bankruptcy is a form of debt relief that requires you to make payments to creditors over a three- or five-year period, after which any qualifying debts that remain are discharged, or canceled. Here’s how it works.
Chapter 13 is a provision of federal bankruptcy law which enables individuals, married couples, and businesses that cannot pay their debts to start over. Like other forms of bankruptcy protection, Chapter 13 shields debtors from lawsuits, wage garnishment, and other tactics creditors may use to collect outstanding debts. Chapter 13 can ultimately free you from many debts, but certain obligations cannot be discharged.
This type of bankruptcy is intended for individuals and couples with sufficient financial resources to make full or partial repayment to creditors over time. Resources may include assets that can be sold to satisfy debts and disposable income—earnings left over after paying for essential living costs. Chapter 13 repayment plans limit monthly payments to no more than 15% of your disposable income.
Specifics of a Chapter 13 repayment plan are determined by the bankruptcy court, based in part on a means test you must complete as part of the bankruptcy process.
The means test compares your earnings and living costs to the median income and expenses for other households the size of yours in your community. If your income is less than or equal to the local median amount, your case will be considered a hardship and you’ll be assigned to make repayments over a three-year span, or commitment period. Otherwise, you’ll be assigned a standard five-year commitment period.
The means test also calculates your disposable income and is used to set the amount of the monthly payments the court will collect to repay your creditors.
Examples of debts that can be fully discharged after completing a Chapter 13 repayment plan include the following:
However, certain debts cannot be discharged, such as:
The most significant ways Chapter 13 differs from Chapter 7, the other form of bankruptcy protection most commonly pursued by individuals (as opposed to businesses), are:
To be eligible for a Chapter 13 bankruptcy repayment plan you must have:
Here are the steps involved in a Chapter 13 bankruptcy procedure:
A Chapter 13 bankruptcy remains on your credit reports for up to seven years from the date you file. If you are filing bankruptcy, there’s a good chance your credit scores will already have been reduced because of missed or late payments. In that case, filing bankruptcy may not bring a large drop in your credit scores. A bankruptcy will hurt your credit scores as long as it remains on your credit report, but its impact will lessen over time.
That depends on the type of debts you have. Chapter 13, like all federal bankruptcy processes, cannot discharge all debts. Priority debts, including alimony and child support, criminal fines, certain unpaid taxes, and federal student loans, are exempt from discharge under bankruptcy.
At the end of your three- or five-year commitment period, if you’ve kept up with all payments under your Chapter 13 plan, the bankruptcy court will cancel out any non-priority debts that aren’t repaid in full, a process known as a bankruptcy discharge. Once a debt is discharged, creditors and collection agencies are forbidden from seeking further payment.
Once you file for Chapter 13 bankruptcy, your mortgage lender is forbidden from initiating foreclosure proceedings against you (although in some states, foreclosure begun before you file may be allowed to continue). If you are behind on mortgage payments when you file for bankruptcy, the court can require your mortgage lender to accept a repayment plan that lets you get current with your payments within three years. If you do so, and continue to make payments on schedule afterward, you can keep your home. If you fail to make any payments under this arrangement, however, the lender may be permitted to seize the house.
Once you notify collection agencies that you have filed bankruptcy, they must cease attempting to collect payments.
Filing Chapter 13 bankruptcy costs $310 total—a $235 case filing fee and a $75 miscellaneous administrative fee. Normally, fees are to be paid in full when bankruptcy is filed, but payment in up to four installments can be arranged at the court’s discretion.
In addition, the bankruptcy trustee may charge a fee of $15 or $20, and you may be charged fees for court-mandated financial education classes and credit counseling. These services may be available at little or no cost from nonprofit credit counseling services. If you hire a bankruptcy attorney, you’ll also be responsible for their fees.
The decision to file Chapter 13 bankruptcy is never an easy one, but the process can provide much-needed relief from the anxiety of unpaid bills and debt collectors while enabling you to keep your home and other assets. While the bankruptcy stays on your credit reports for seven years, you can begin to rebuild your credit by making on-time payments, the factor that affects your credit score the most. Throughout the bankruptcy process, it’s essential to monitor your credit score and credit report to ensure you’re on the right track to rebuilding your credit once your bankruptcy is complete.
For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. Our team is here to assist you with confidence and expertise.
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