Chapter 13 Bankruptcy
At Hooman Khoshnood Law, PC, we help good Texans, restructuring debts and getting the financial relief they deserve through chapter 13 Bankruptcy.
Table of Contents
- What’s Chapter 13 Bankruptcy?
- Chapter 13 Eligibility
- Do I pay all of my debt back in a Chapter 13 bankruptcy?
- Benefits of Chapter 13 Bankruptcy
- Chapter 13 Bankruptcy Attorney
- Can IRS debt be discharged in a Chapter 13 Bankruptcy?
- Debt Settlement, Debt Consolidation, and Chapter 13 Bankruptcy
- What is Chapter 13 Bankruptcy in Texas?
What’s Chapter 13 Bankruptcy?
Chapter 13 of the U.S. Bankruptcy Code is commonly referred to as Chapter 13 or the wage earner’s plan. It is a reorganization type of bankruptcy for individual debtors. In most situations, the filer must make monthly payments to a chapter 13 bankruptcy trustee, who distributes the money to the filer’s lenders according to the chapter 13 plan. Making a monthly payment does not mean that all debt is paid in full; rather, debt can be adjusted within the parameters of bankruptcy law. Unsecured creditors may received little to nothing out of chapter 13 payment plans, and a car creditor may have to accept a lower interest rate and outstanding balance. Not all debt is treated the same in a Chapter 13 bankruptcy and some debt can be wiped while other debt is repaid.
Chapter 13 Eligibility
Corporations, LLCs, and other business entities that are not natural persons are excluded from filing Chapter 13 bankruptcy. Corporations as individuals have Chapter 11 bankruptcy as a bankruptcy option. To file for chapter 13 bankruptcy, you must be a person, not a corporation.
You must also have a regular source of income. Chapter 13 bankruptcy for W2 wage earners who receive a steady paycheck is common. “Regular source of income” is a broad idea and includes real estate and other professionals who earn irregular commissions. It also includes self-employed people who run a business without paying themselves through regular paychecks.
Eligibility Debt Limits
Until June 21, 2024, the aggregate debt limit for noncontingent, liquidated debt (both secured and unsecured) is $2,750,000. After, the debt limits for secured debt and unsecured debt will be set separately by Congress.
Chapter 13 Filing Requirements
- ➡ With limited exceptions, filers must complete an approved credit counseling course within 6 months of the filing date.
- ➡ File the bankruptcy petition, schedules and other documents required for a chapter 13 bankruptcy (often available on bankruptcy courts’ websites).
- ➡ Propose a chapter 13 reorganization plan compliant with the bankruptcy code.
- ➡ Complete a debtors education course after the case is filed.
- ➡ Comply with other required rules that can change from court to court.
- ➡ Last income tax return is reviewed by the Chapter 13 trustee.
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Do I pay all of my debt back in a Chapter 13 bankruptcy?
Because Chapter 13 requires a monthly payment, people make the incorrect assumption that all debt owed is repaid in the Chapter 13 repayment plan. Although a filer may have to pay all of her debt, often, that’s not the case. It is also possible to eliminate or reduce unsecured debt such as credit card debt, most personal loans, and medical bills while paying back a car loan or non-dischargeable debt such as back child support, alimony, and other domestic support obligations.
In other words, debt can be wiped or repaid depending on the type of debt, the filer’s goals in filing for a chapter 13 bankruptcy, and the bankruptcy code’s requirements. The interplay of these three factors creates a lot of variation in how chapter 13 bankruptcy plans are structured and implemented.
For example, a filer may want to wipe out his credit card debt while continuing to pay for his car. Assuming the plan is otherwise compliant with the bankruptcy code, getting rid of unsecured debt while paying a car note is possible.
Or, another filer may file for a chapter 13 bankruptcy to pay back child support, a non-dischargeable debt, while eliminating a repo fee and credit card debt. That’s also possible, provided that the repayment plan proposed complies with the bankruptcy code.
Alternatively, another filer may face foreclosure of her home, have credit card debt, owe income tax debt, and wants to surrender a car she does not need. It is possible to confirm a chapter 13 plan that repays missed mortgage payments, stops foreclosure, discharges credit card debt, and repays tax debt.
As you can see, there is a lot of variation in crafting a chapter 13 plan. If you are considering bankruptcy, read below under the “Chapter 13 Bankruptcy Attorney” section.
Benefits of Chapter 13 Bankruptcy
It protects your assets and property.
While in chapter 7, nonexempt property and nonexempt assets can be liquidated, chapter 13 bankruptcy is not about liquidation. It is designed to protect your things and property. It could be suitable for people who have nonexempt assets and nonexempt property that could get liquidated in a chapter 7 bankruptcy.
It stops repossessions and foreclosures.
It stops foreclosures on a home mortgage or other mortgages. It also provides a way to pay back missed mortgage payments through the chapter 13 plan. This way, the homeowner protects her home and brings her mortgage current by making her chapter 13 plan payments. Not only does the filing of a chapter 13 bankruptcy stop repossession, it could also pay for the vehicle through the chapter 13 plan.
It lowers the interest rate on vehicles.
Depending on the risk factors involved, auto loan interest rates can be reduced in a Chapter 13 bankruptcy.
It reduces car loan balances.
In some circumstances, the balance owed on a vehicle can be reduced in a chapter 13 plan.
It reduces mortgages.
In some circumstances, second mortgages on a filer’s residence (home equity lines of credit) can be eliminated. Likewise, it is possible to reduce mortgages not secured by the filer’s residence.
It eliminates unsecured debt.
Depending on factors such as the amount of nonexempt property, monthly household income, disposable income (income-expenses), the means test results, and prior bankruptcy filings, credit card debt, repo deficiencies, medical bills, and under unsecured debt can be eliminated in whole or in part with a successful chapter 13 plan.
It’s a good way to repay nondischargeable debt.
Back child support and alimony are considered priority claims and cannot be wiped out in any bankruptcy, including chapter 7 and chapter 13. A Chapter 13 plan can provide for the repayment of such debts out of the monthly plan payment.
It is a good way to pay income tax debt.
Not all income tax debt is considered a priority claim and, therefore, not dischargeable. Some income tax debt can be discharged in a chapter 13 bankruptcy, and the portion that cannot be discharged can be repaid through the chapter 13 repayment plan. Repaying outstanding tax debt without accruing penalties and interest for up to five years is a powerful benefit of chapter 13 bankruptcy.
It protects a cosigner from debt lawsuits and other collection efforts.
Parents often cosign for their kids, and friends cosign for other friends to get a car. If the debt is not paid, the creditor can demand payment from the cosigner. To protect the cosigner, the other borrower can repay the cosigned debt in a chapter 13 plan, eliminating the lender’s need to pursue the cosigner.
Chapter 13 Bankruptcy Attorney
Chapter 13 Bankruptcy is a highly specialized area of law. Most lawyers know little about bankruptcy, and even a smaller subset understand chapter 13 bankruptcy. While there are those attorneys who dabble and file the occasional chapter 7 bankruptcy, an attorney who does not do significant chapter 13 work is probably not ideal for representing clients before the bankruptcy court in a chapter 13 bankruptcy case.
Furthermore, there is a surprising amount of local practice and unwritten rules that a bankruptcy lawyer should be familiar with when representing a debtor in a Chapter 13 bankruptcy. Such knowledge comes with experience practicing before the local courts. An out-of-state law firm probably is not the ideal choice. Find a lawyer who focuses on chapter 7 and chapter 13 bankruptcy. The lawyer should understand both chapter 7 and chapter 13 because there is a significant interplay between the two bankruptcy chapters. A good consultation considers both chapters.
In short, avoid lawyers who dabble in bankruptcy. Find a lawyer that files both chapter 7 and chapter 13 bankruptcy and practices in your area. Be sure the lawyer has a good reputation and understands the workings of your local bankruptcy court and chapter 13 trustee’s office.
Can IRS debt be discharged in a Chapter 13 Bankruptcy?
Some IRS debt can be discharged in a chapter 13 bankruptcy. The IRS debt that cannot be discharged in a Chapter 13 bankruptcy can be repaid with significant benefits. Here is how.
IRS tax debt is classified as unsecured debt, secured debt (tax lien), and priority debt. The unsecured debt portion of IRS tax liability (if any) can be discharged in a Chapter 13 plan depending on how the plan treats unsecured debt. The priority debt portion of an IRS tax debt is not dischargeable but it can be paid in a Chapter 13 Plan without accruing penalties and interest while the bankruptcy case is active. The secured portion of IRS tax debt also cannot be discharged in a Chapter 13 bankruptcy, but it can be paid in a chapter 13 plan.
To summarize, IRS unsecured tax debt is classified along with other unsecured creditors and is discharged to the extent other unsecured debt is discharged. IRS priority tax debt is paid inside without penalties and interest inside of a chapter 13 bankruptcy plan. IRS secured tax debt is als paid with interest inside a chapter 13 bankruptcy plan.
Debt Settlement, Debt Consolidation, and Chapter 13 Bankruptcy
Debt consolidation and Chapter 13 bankruptcy are often confused by the general public since they both involve a monthly payment. However the two are very different. Firstly, debt consolidation relies on a voluntary repayment arrangements with creditors. A settlement offer is proposed to generally an unsecured creditor and the unsecured creditor may or may not go along with the offer. They are typically not under a legal obligation to accept the settlement offer. However, in a chapter 13 bankruptcy, the rules of the bankruptcy code generally dictate how debt is repaid. Debt repayment plans are generally based on what the bankruptcy code requires as opposed to a voluntary agreement between creditors and a debtor.
Secondly, debt consolidation is generally not intended for secured debt such as mortgages and car loans. A chapter 13 bankruptcy on the other hand can adjust auto loans and some mortgages within the bounds of the bankruptcy code.
What is Chapter 13 Bankruptcy in Texas?
Important Notice: The information in this article or anywhere else on the website is for informational purposes and may not be accurate. The information contained herein is not to be viewed as legal advice. It also may not apply to your situation, or it may not apply to the rules that govern debt lawsuits in your jurisdiction. Do not rely on this information. Seek expert counsel in your area. If you are in Texas, contact us for a free evaluation of your financial situation.
We are designated a debt relief agency by the U.S. Congress.
Hooman is a 18 year bankruptcy veteran from Georgia. He recently relocated to Texas to aid people on their path to financial recovery. During his time away from the office he finds peace in art, writing,
teaching, and traveling.
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