Chapter 13 Bankruptcy



Chapter 13 Bankruptcy

People who acquire large amounts of debt often do so under the assumption that they are going to be able to repay loans, credit cards, and other sources with ease. Unfortunately, there are numerous people who lose their jobs, lose their sources of income, or deal with other hardships that impact their ability to pay their debts. As a result, many people turn to bankruptcy as a way to discharge their debts and start over financially.

Debtors must consider at least two bankruptcy options, Chapter 7, which is sometimes referred to liquidation, and Chapter 13, which is a reorganization of your debts.  The large majority of bankruptcies are filed under Chapter 7  A smaller but not insignificant portion of debtors file “Chapter 13” bankruptcy. Here, we will discuss Chapter 13 bankruptcy, who qualifies for it, and other various details so you know if Chapter 13 this is an option for you.

What is a Chapter 13 Bankruptcy?

Chapter 13 bankruptcy, is often referred to as reorganization bankruptcy.  Rather than immediately discharging debts, as happens in Chapter 7, debtors utilize this procedure to restructure their payments and create a payment schedule that better suits their financial situation.  Most people who file Chapter 13 do so in order to restructure or reinstate a secured debt such as a mortgage or an automobile loan.  In this way, you can stop a foreclosure or an automobile repossession.  Debtors also file Chapter 13 because they are not eligible for relief under Chapter 7 of the bankruptcy code.

Rather than discharging debts, debtors utilize this process to create a payment schedule for their debts. Typically, these repayment schedules last for three to five years, depending on the amount of debts the person has or the amount of debtors’ current monthly income as defined by the Bankruptcy Code.

Lenders often prefer Chapter 13 bankruptcy vs Chapter 7 bankruptcy due to the fact that Chapter 13 provides some hope to lenders who that they will receive payments. Partial or full payment of debts is not only beneficial for the filing debtors but they are good for creditors as well.

A Trustee in the Chapter 13 Bankruptcy Process

Similar to requirements set forth in Chapter 7 bankruptcy, a trustee is required in Chapter 13 bankruptcy procedures. Designated trustees are required to review the proposed plan to ensure that it meets various criteria for filing. Trustees act as a main point of contact for a debtor and will handle communication between debtors and creditors.

Trustees are able to challenge the proposed bankruptcy plan in court if they believe the terms of the plan are improper. Once the Chapter 13 plan is approved and confirmed by the bankruptcy court, the trustee provides the service of collecting the plan payments and distributing funds to creditors. Specifically, debtors who file Chapter 13 bankruptcy will remit their monthly payments to the trustee, who will then take the money and divide it up between various creditors and issue the payments to them.

Who is Eligible to File a Chapter 13 Bankruptcy in Vermont?

Debtors must meet specific criteria to be able to file a Chapter 13 bankruptcy in our state. In general, debtors must have a regular source of income. The income must be enough to provide them a satisfactory standard of living while they repay their debts.

Debtors must have under $419,275. in unsecured debts. These are debts that are not backed by collateral, like credit cards and medical debts. Debts such as homes and automobiles are secured.  Debtors interested in filing a Chapter 13 bankruptcy cannot have more than $1,184,200 in secured debts.

Once you establish that you meet these debt requirements, you must file for the Chapter 13 bankruptcy with the court. You must meet several tests in order for the bankruptcy to be approved and confirmed. When filing, you must propose your repayment plan in good faith. Essentially, you are stating that you intend to comply with the plan in its entirety and that you are not attempting to provide any false or misrepresentation of your financial resources or conduct any fraudulent actions.

Chapter 13 bankruptcy plan proposals must meet the “best interests of creditors” test as well. This test requires that a plan is designed to pay unsecured creditors amounts that they would have had if you filed a Chapter 7 bankruptcy. Given the fact that many debts to creditors are often discharged in Chapter 7 filings, these standards are quite easy to meet.

In addition to the best interests of creditors test, the plan must also meet the “best efforts” test. This test requires that the plan proposed under the Chapter 13 bankruptcy will pay unsecured creditors a specified amount multiplied by the debtor’s disposable income.

What is the Difference between a Chapter 7 and Chapter 13 Bankruptcy?

Although both Chapter 13 bankruptcy and Chapter 13 bankruptcy are both extremely common in Vermont, they both offer key differences that benefit debtors in different ways. It is crucial to understand the differences to determine which option is best for you.

Chapter 7 bankruptcy provides debtors the option of discharging, or getting rid of, their debts entirely. These bankruptcies clear debts from the responsibility of consumers so they can have a fresh new start financially.  Unfortunately, Chapter 7 bankruptcy can have a detrimental impact on the creditworthiness and score of debtors.

Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy provides debtors the opportunity to restructure a payment plan for their debts. These bankruptcies tend to take longer and provide debtors adequate opportunities to pay off the bulk of their debts in a responsible and manageable way. In some cases, debtors are able to discharge some of their debts during and after their procedures are finished.

When people file Chapter 7 bankruptcies, they are often required to surrender property during the process. People who discharge auto loans and mortgages can end up without homes and transportation. Alternatively, Chapter 13 bankruptcy affords people the ability to continue paying their debts in a more organized manner so they can keep their property.

In general, debtors are required to continue making payments on unsecured debts during their repayment plans. If they successfully complete the repayment plan, they are able to discharge any remaining unsecured debts.

How a Chapter 13 Bankruptcy Will Impact Your Credit

If you are considering filing for bankruptcy, chances are that your credit is already taking a substantial hit. Sadly, not being able to pay your debts and obligations can have a quick and devastating impact on your credit rating. Although a Chapter 7 bankruptcy can result in a drop over 200 points, Chapter 13 does not typically have such a drastic impact. Unfortunately, it will still have an impact on your credit report. In many cases, debtors see a reduction around 100 points in their credit scores after filing a Chapter 13 bankruptcy. Although this is generally the case, choosing one type of bankruptcy over the other will not provide you with many benefits if you are trying to preserve your score.

It is important to note that a Chapter 13 bankruptcy will remain on your credit for ten years after the date of filing. Thankfully, debtors will see their credit rating improve gradually over time so long as they continue to make payments on time to creditors, as arranged.

Obtaining Credit During and After a Chapter 13 Bankruptcy

Debtors who are actively involved in a Chapter 13 bankruptcy are generally prohibited from obtaining any new loans or lines of credit. This can make dealing with unexpected issues quite difficult during the process. Fortunately, courts do recognize that the need for credit arises during the time a debtor is making payments on their Chapter 13 plan. The fact that Chapter 13 bankruptcy can last between three and five years means there is a likely chance that a debtor may experience car problems, have appliances break, and deal with other challenges that could require them to take on new credit obligations.

After the bankruptcy case ends, and you receive your order for discharge, you should not have too many problems finding and qualifying for new credit. It is important to know that you may have to pay higher interest charges for the first few years to re-establish yourself. It is crucial that you do not take on more than you can pay. It is equally important to make all payments on time as it will drastically help improve your credit score, which will result in better interest rates later on.

Let Our Team Help You with Your Chapter 13 Bankruptcy

With over 150-years of combined experience, our attorneys at Kohn Rath Danon Lynch & Scharf, LLP are able to provide competent, aggressive, and respected legal representation to you throughout your Chapter 13 bankruptcy. Our team is available to provide guidance and to help you determine the best route forward for handling your repayment plan and rebuild your life and credit.

Contact our team at Kohn Rath Danon Lynch & Scharf, LLP by calling (802) 482-2905. Schedule a free case evaluation at your earliest convenience so we can discuss how a Chapter 13 bankruptcy may help you.

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Our Attorneys:

Kohn Rath Danon Lynch & Scharf, LLP is a  Vermont law firm located in the Town of Hinesburg, providing a broad and comprehensive array of legal services to our clients.  Our attorneys have experience in many practice areas of the law.

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Roger E. Kohn
Roger E. Kohn
Partner - Former President of the Chittenden County Bar Association
David Rath
David Rath
Partner
Beth A. Danon
Beth A. Danon
Partner - Former President of the Vermont Association for Justice (the Vermont Trial Lawyers Association)
David W. Lynch
David W. Lynch
Partner

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