How Does Chapter 13 Bankruptcy Work?

Determine Whether Chapter 13 Bankruptcy is Right for You

When new bankruptcy legislation was enacted several years ago, part of the law set guidelines about who could file Chapter 7 bankruptcy and who had to file Chapter 13. Because Chapter 13 is messier and more expensive, first see whether you can file under Chapter 7. To do this, you need to determine whether your monthly income is less or more than the established median income in your state. If you earn less, you can file Chapter 7. If you earn more, you may still qualify for Chapter 7 through the Means Test. Subtract your monthly expenses from your monthly income, then multiply the difference by 60. If the amount is less than $9,999 or if your total unsecured debt is greater than 25 percent of your total income, you can still file Chapter 7. Otherwise, you will be required to file Chapter 13 bankruptcy.

Early Steps

The new law also dictates that anyone filing either type of bankruptcy must complete a counseling session within six months of filing. Your attorney can help you locate online and offline approved counseling services. You will be required to pay a fee for this service. While you are in the counseling program, you will also be completing the paperwork required for filing Chapter 13 bankruptcy. This will take some time because you must include all of the details about your debt and income for multiple years. Documentation must also be provided of your income, including three years' worth of tax returns and at least two months' pay stubs. When you submit the paperwork and pay the filing fee (this is often included in your debt and may not need to be paid upfront), your attorney will being to prepare the legal paperwork based on the information you have submitted. Once completed, the paperwork will be submitted to the courts and you will have to wait for an appointment with the trustee's office.

Trustee Meeting

During your meeting with the trustee, your financial situation will be evaluated. She will look at what you owe and at how much you earn to determine the appropriate payment arrangement. Do not be surprised if the trustee calls into question some of your expenses. You may be asked to explain or document some of those expenses in order to be able to claim them on your paperwork. Generally, your attorney will propose an initial payment arrangement amount based on what he believes to be fair based on the information. However, the trustee is under no obligation to accept this amount. Instead, she has the final say over what you will be paying each month for the next three years. All of the payments will go toward paying off your secured debt. Most of the unsecured debt is written off. Also, you will be allowed to keep any property you want, including businesses and real estate.

After Payments are Established

Once the trustee makes her decision on payments, you are required to make those payments every month until the repayment term, normally three years, is completed. If you fail to make any of the payments, your bankruptcy suit will be dismissed by the courts and you will have to start all over again. The trustee's office may have certain conditions under which you can ask to skip a payment or to pay a partial payment. For example, if you need to pay a large automobile repair bill, the trustee may allow you to miss that month's payment. However, you will just be extending the payment term by another month. After the payment term is completed, your debts will be paid and your bankruptcy will be discharged. It will remain on your credit report for up to seven years after that date.