Individuals have the option of entering Chapter 7 or Chapter 13 bankruptcy. As discussed in an earlier post, Chapter 7 involves liquidation of the debtor’s assets meaning that most of the debtor’s assets are sold or returned to creditors to satisfy the bankruptcy. Alternatively, Chapter 13 bankruptcy involves a repayment plan in which the debtor restructures his existing debt to permit him to repay existing debts over time.
Background of Chapter 13
Chapter 13 is sometimes referred to as the wage earner’s plan. Under Chapter 13, the debtor (the person who files for bankruptcy) to make repayments over either three or five years to their creditors. If the debtor’s monthly income is below his or her state’s median income, then the plan will only be for three years. If above the state’s median income, then the plan will be for five years. During the repayment plan, creditors may not engage in collections during the repayment plan.
Advantages of Chapter 13
Chapter 13 can be advantageous over Chapter 7 because it permits the debtor to keep his home. The Chapter 13 debtor is permitted to pay back his delinquent mortgage payments over the course of the repayment plan. The repayment plan may also permit the debtor to restructure debts on existing debts on secured loans. Secured loans include car loans. So, a Chapter 13 debtor has the opportunity to keep his car if he includes the payments, including any delinquent payments, in the repayment plan.
Starting a Chapter 13 Case
A debtor must file a petition with the bankruptcy court for the area in which he resides. The debtor must provide the following information to the court:
1. schedules of assets and liabilities,
2. a schedule of current income and expenditures,
3. a schedule of executory contracts and unexpired leases, and
4. a statement of financial affairs.
A married couple may either file a joint petition or individual petitions. Married couples must gather the income and expenditures of both spouses regardless of whether or not both spouses are filing for bankruptcy. This is to provide the court with a complete picture of the household’s financial situation.
Like Chapter 7, Chapter 13 gives debtors an automatic stay that prohibits creditors from trying to collect on existing debts. Chapter 13 also protects “co-debtors” from collections. That means that a creditor cannot collect from either the debtor himself or someone who co-signed on a consumer debt.
What is a Priority Claim?
When you are compiling your financial information to report your assets, income, and expenses, one important set of claims are priority claims. Priority claims are claims which are to be paid before other debts. The two major types of priority claims are spousal support, child support, and tax debt. This means that child or spousal support (or domestic support) as well as claims from the IRS or your state tax department must be paid in full. Generally, priority claims are paid after secured claims (such as for housing and cars) are paid, but before consumer debt.