Chapter 13 is a type of bankruptcy that allows the debtor to reorganize their debts into a more manageable payment plan. However, to qualify for Chapter 13, you have to meet certain qualifications and creating a payment plan can be complicated. Keep reading to learn how to create a Chapter 13 reorganization plan.
Do I Qualify for Chapter 13 Bankruptcy?
Chapter 13 is a positive bankruptcy solution for many people, but you might not qualify depending on your unique situation.
In order to be eligible, you must prove that you are:
- Up to date on filing all required tax returns
- Within debt limitations
- Employed with enough income to cover monthly payments
- An individual not a business
If you’re unemployed, with no income, you might need to pursue an alternative to Chapter 13. Additionally, if you’re short on disposable income, you probably won’t qualify either. Disposable income is whatever money left after paying for necessary expenses like bills, groceries, and other necessities. In these instances, a Chapter 7 bankruptcy is more likely a better option.
You can pay off debt according to a Chapter 13 reorganization plan with funds from the following sources:
- Wages or salary
- Self-employment income
- Seasonal work income
- Social Security benefits
- Unemployment benefits
- Disability or workers’ compensation
- Proceeds for property sales
- Child support and/or alimony
The catch for Chapter 13 is that you cannot have debts that exceed $1,184,200 (secured) or $392,725 (unsecured). If you have debt higher than the limit, speak to an attorney about an alternative option.
Making a Payment Plan
Once you file a petition for Chapter 13 bankruptcy, most debt collection and creditor contact stops. After you file the petition, you have two weeks to submit a payment plan to the court. The judge must approve your plan before it’s put into action.
Your plan will need to provide a payment schedule for the following debts:
- Priority payments: This includes taxes and the cost of bankruptcy proceedings
- Secured debt: Loans that require collateral are secured which makes debt to the creditor secured as well
- Unsecured debt: This is any debt not secured with collateral
Your plan will need to pay off priority payments in full. If you intend to hold onto collateral that is a part of secured debt, you’ll have to pay an amount equivalent to the value of the collateral. For example, if your car is collateral for a loan, you’ll need to pay the creditor the total value of the car to avoid repossession.
You won’t have to pay unsecured debt in full as long as you show the court that you intend to use all disposable income to cover the monthly payments. The duration of your payment plan, and the flexibility of the payments depends on how much disposable income you have.
When you review your plan, make sure that it is realistic. The court will not accept a payment plan that is outside of the realm of possibility. For example, if you draft a plan where you pay off all debts within the year, the judge will probably reject it. On the other hand, if your plan will take more than five years to resolve, you might need to consider a different approach or even a different type of bankruptcy.
Creating a Chapter 13 debt reorganization plan is tedious, and it’s best to work alongside a qualified attorney. A lawyer can help you draft a plan that is acceptable to the court and advocate for your interests before the judge. Chapter 13 payment plans are complicated, but with the help of an attorney you can pay off your debts in time.