Chapter 13 bankruptcy, sometimes called the wage earner’s plan, or reorganization bankruptcy, is quite different from Chapter 7 bankruptcy (which wipes out most of your debts). In a Chapter 13 bankruptcy, you use your income to pay some or all of what you owe to your creditors over time — anywhere from three to five years, depending on the size of your debts and income.
Chapter 13 bankruptcy isn’t for everyone. Because Chapter 13 requires you to use your income to repay some or all of your debt, you’ll have to prove to the court that you can afford to meet all of your payment obligations. If your income is irregular or too low, the court might not allow you to file for Chapter 13.
If your total debt burden is too high, you are also ineligible. Your secured debts cannot exceed $1,010,650, and your unsecured debts cannot be more than $336,900. A “secured debt” is one that gives a creditor the right to take a specific item of property (such as your house or car) if you don’t pay the debt. An “unsecured debt” (such as a credit card or medical bill) doesn’t give the creditor this right.
The Chapter 13 Process
Before you can file for bankruptcy, you must receive credit counseling from an agency approved by the United States Trustee’s office. (For a list of approved agencies for cases filed in the Eastern District of Wisconsin, click here.) These agencies are allowed to charge a fee for their services, but they must provide counseling free or at reduced rates if you cannot afford to pay. We recommend www.cricketdebt.com because we have found them to be the most informative and fastest service provider.
Once you’ve completed your counseling, the credit counseling agency will give you a certificate showing that you met the requirement. To begin your bankruptcy case, you must file this certificate with the bankruptcy court, along with a packet of forms listing what you own, earn, owe, and spend. You’ll also need to submit your federal tax return for the previous year and proof that you filed federal and state tax returns for the previous four years. In addition, you must file a Chapter 13 repayment plan showing how you will pay off your debt. And you’ll have to pay the filing fee, which is currently $274.
The Chapter 13 Repayment Plan (the “Plan”)
The Plan is the most important paper in your entire Chapter 13 bankruptcy case. It describes in detail how (and how much) you will repay each of your debts. There is no official form for the Plan; we choose the content of Plan to suit the needs of each case.
Making Payments on the Plan
You must begin making payments under your Plan within 30 days of the date you file your case with the bankruptcy court. Your payments go to a Memphis, Tennessee payment center used by the Chapter 13 Trustees (the person assigned by the court to oversee your case). Once your Plan is confirmed, the trustee will distribute the money to your creditors.
If you have a job with regular income, you may choose to have your monthly payments automatically deducted from your wages and sent directly to the trustee, however, you can also choose to mail your monthly Plan payments to the trustee yourself.