An Overview of Chapter 13 Bankruptcy

 Chapter 13 bankruptcy, the net earner's plan, or we can say restructuring bankruptcy, is quite different from Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, you use your income to pay some or all of what you owe to your creditors over time -- anywhere from three to five years, depending on the size of your debts and income.

Chapter 13 bankruptcy isn't for everyone. Because Chapter 13 requires you to use your income to pay off some or all of your debt, you'll have to prove to the court that you can afford to meet all of your payment requirements. If your income is irregular or too low, the court might not allow you to file for Chapter 13. If your total debt burden is too high, you are also ineligible. A secured debt is one that gives a creditor the right to take a specific item of property, such as your house or car if you don't pay the debt. An unsecured debt, such as a credit card or medical bill) doesn't give the creditor this right.

Before you can file for bankruptcy, you must receive credit counseling from an agency approved by the United States Trustee's office. These agencies are allowed to charge a fee for their services, but they must provide counseling free or at reduced rates if you cannot afford to pay.

After completing your counseling, the credit counseling agency will give you a certificate showing that you met the requirement. To begin your bankruptcy case, you must file this certificate with the bankruptcy court, along with a envelope contain with the records of what you own, earn, owe, and spend. You'll also need to submit your federal tax return for the previous year and proof that you filed federal and state tax returns for the previous four years. And you must file a Chapter 13 repayment plan, a most important paper in Chapter 13 bankruptcy case, showing how and how much you will repay each of your debts in details. There is no official form for the plan, but many courts have designed their own forms.

You must begin making payments under your Chapter 13 repayment plan within 30 days after you file it with the bankruptcy court. Generally, you make payments directly to the bankruptcy trustee. Once your repayment plan is confirmed, the trustee will distribute the money to your creditors. If you have a regular job with regular income, the bankruptcy court may order that your monthly payments be automatically deducted from your wages and sent directly to the bankruptcy court.

Your Chapter 13 Bankruptcy plan must pay certain debts in full. These debts, which include child support and alimony, wages you owe to employees, and certain tax obligations, called priority debts. In addition, your plan must include your regular payments on secured debts, as well as repayment of any arrearages on the debts.

The plan must show that any disposable income you have left after making these required payments will go towards repaying your unsecured debts, such as credit card or medical bills. You don't have to repay these debts in full. You just have to show that you are putting any remaining income towards their repayment.
The length of your repayment plan depends on how much you earn and how much you owe. If your average monthly income over the six months prior to the date you filed for bankruptcy is higher than the median income for your state, you'll have to propose a five-year plan. If your income is lower than the median, you may propose a three-year plan. No matter how much you earn, your plan will end if you repay all of your debts in full, even if you have not yet reached the three- or five-year mark.

If for some reason you cannot finish a Chapter 13 repayment plan the bankruptcy trustee may modify your plan by giving you a gracing period or extending the repayment period or by reducing the monthly payments. If it's clear that there's no way you'll be able to complete the plan because of circumstances beyond your control, the court might let you discharge your debts on the basis of hardship.

Once you complete your repayment plan, all remaining debts that are eligible for discharge will be wiped out. Before you can receive a discharge, you must show the court that you are current on your child support and/or alimony obligations, and that you have completed a budget counseling course with an agency approved by the United States Trustee.