Bankruptcy is the legal situation of a financially troubled debtor where s/he is unable to repay the debts owed. Under the U.S. laws, there are two types of bankruptcies; Chapter 7 bankruptcy and Chapter 13 bankruptcy. Title 11 of the U.S. Code governs Chapter 13 bankruptcy.
Chapter 13 bankruptcy is that kind of bankruptcy which is available as a remedy to a financially unwell person who has regular monthly income. S/he need not be a regular wage earner or a salaried; but should have sufficient income to make necessary repayments to pay off his/her creditors. The beauty of Chapter 13 bankruptcy is that the debtor does not have to surrender his/her real property, but has to pay the debts off in full or part within a specific time period. Chapter 13 bankruptcy is confirmed by the court only if the judge feels that the debtor can afford monthly payments to the extent of paying off the debts within a stipulated time.
One of the major steps that a person has to undergo before filing a Chapter 13 petition is to attend credit counseling by an agency approved by the United States Trustee’s office. The credit counseling agencies have the right to charge a nominal fee for their services. However, if the debtor is unable to pay, the credit counseling agency should provide counseling free of cost. A prescribed court filing fee should also be paid, and it may vary from one state to another. The debtor should also file a repayment plan along with the Chapter 13 bankruptcy petition. This repayment plan shall ensure that the debts are paid off in three to five years according to his/her monthly income.
All payments will be through a trustee appointed by the U.S. trustee services. The trustee acts as the representative of creditors and will ensure that the repayment plan is properly followed. The trustee will collect all monies from the debtor and make payments to the creditors. All priority debts including child support and alimony, employee wages, and tax obligations will be paid off in full. The second priority would be on secured debts such as mortgages and vehicle loans. Payments to unsecured creditors come third in the repayment plan.
Once the repayment plan is over, all remaining dischargeable debts will be wiped out. The debtor should also attend a budget counseling course under a U.S. Trustee approved agency. The creditors who have been provided payment in full or part under the payment plan will no longer pursue the debtor or initiate any other action for collecting money. The debtor shall be discharged of all obligations except for any long term payments such as home mortgages, child support and alimony, government funded educational loans, any debt arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, debts for restitution or a criminal fine included in a sentence on the debtor’s conviction of a crime, and certain taxes.
However, in rarest of cases, the debtor may request the bankruptcy court to grant a “hardship discharge.” This happens when the debtor, after confirmation of the payment plan, fails to comply with it to make regular payments. The court may grant a hardship discharge if it is proved beyond doubt that the reason for failure to make regular payments was beyond the debtor’s control and not because of fault of the debtor. A hardship discharge may be granted only after the creditors have received at least as much amount as they would have received under a chapter 7 bankruptcy case, and when modification of the plan was not possible.
Severe injury or disease that affected the debtor’s capacity for employment and earn regular income can be considered a sufficient reason for granting hardship discharge. If the debtor does not qualify for a hardship discharge, then s/he can convert it to a Chapter 7 bankruptcy.
Laws regarding discharge under Chapter 13 plan is complex and has undergone major changes. Therefore, it is always good to consult a competent legal counsel before filing Chapter 13 bankruptcy petition.