People who file a Chapter 13 bankruptcy do so in order to keep property in which a creditor has a lien — like a house or car, or if payments are behind and the creditor is about to foreclose or repossess the property. The filing of a Chapter 13 will stop the foreclosure sale and allow the person 3 to 5 years to repay some, but not all of their debts. Rather than wiping out all their debts in a Chapter 7 proceeding, Chapter 13 allows a person to reorganize and pay a certain percentage of their debts over a period of 3 to 5 years. The unpaid balance is discharged after the payment plan is completed. Payments are made from each paycheck to the Chapter 13 Trustee, normally through employer wage deduction.

A Chapter 13 is NOT a bill consolidation loan, although many people look at it that way. Although it is a similar concept, a bill consolidation loan is money actually loaned to you to repay other creditors. In a Chapter 13, no money is loaned to you because you make your monthly payments to the Trustee, who disburses the money among your creditors.

Your priority claims are paid first in a Chapter 13. Priority claims include debts for things like taxes, child support, etc.

The amount you owe unsecured creditors, like medical bills, credit cards, etc. can normally be paid back as low as 5¢ on the dollar. (This figure is not written in stone. It is subject to change depending on your individual State laws, type of debt it is, as well as the income and budget of the debtor.)

You are normally allowed to keep your home, car and everything else you own when you file a Chapter 13 as long as you make regular payments to the Chapter 13 Trustee.

Steps That Occur in Filing a Chapter 13 Bankruptcy

When your bankruptcy petition is prepared and signed by you, it is filed with the Bankruptcy Court. You are assigned a case number and a Trustee. Normally, there is only one Chapter 13 Trustee who makes decisions on all Chapter 13’s filed in his/her jurisdiction. In a Chapter 7, there may be more than one Trustee, called an “interim” as well as a “trustee.”

Your attorney or paralegal will also file a Chapter 13 Plan with your bankruptcy petition that details the amount of your monthly payments and the length of time you are going to be in the Chapter 13 Plan.

This amount you pay each month to the Trustee is determined by the amount of money you currently make and how much money you need to live on each month. A good Chapter 13 bankruptcy attorney or his paralegal is skilled at balancing these two figures so you can easily afford the Chapter 13 payment each month. It is not to the advantage of the attorney or paralegal to give you a payment you can’t afford. This would cause problems later down the road. So don’t be afraid that your payment will be too high for you to afford.

The Trustee will send a notice to all the creditors (people/companies you owe money to.) This notice is normally sent 5 days after you file your petition.

The court will normally send you a notice informing you that you are eligible to file bankruptcy. You don’t have to do anything with this notice but keep it in your personal file.

The Trustee will then send all your creditors, including you, a notice informing you of the hearing date when you should appear in court. This hearing is often referred to as the “Meeting of Creditors.”

At your Meeting of Creditors NO judge will be present. The Trustee will ask you some of the same questions you answered when you first filled out the paperwork for the attorney or paralegal; who originally prepared your bankruptcy petition.

In actual practice, creditors rarely appear at this hearing because they know they will be getting paid through the Trustee; however, a representative from one of the companies you owe, or a person you owe, may also show up at this meeting, but they normally only appear to ask where the secure item is and if it is insured.

After the Trustee has approved your bankruptcy, you are required to pay your first Chapter 13 payment. Your payment must be in the form of a money order or cashier’s check. No cash is accepted.

The Trustee will normally provide you with information on how to contact his/her office with any questions as well as an address where to mail your payments.

At this time, you may want to set up a payroll deduction so you don’t have to worry about writing a check every month. Because a payroll deduction may take 4-6 weeks before it begins, you need to continue making payments to the Trustee on your own until the wage deduction starts. If you get behind in payments, your case could be dismissed and you will have to start all over again.

Finally, a Confirmation Hearing is scheduled but you normally do not appear in court. Your attorney normally appears on your behalf to simply confirm that you are approved to be in the Chapter 13 plan.

Changes in Payments During a Chapter 13 Bankruptcy

Nothing stays the same. During the 3-5 years that you are making regular payments to the Chapter 13 Trustee anything could happen. You may lose your job. Your spouse may lose their job. You may have a new baby. You may inherit some money. Your old car may conk out and you have to replace it. A million things can happen, which means your Chapter 13 payment can be lowered or raised depending on the circumstance.

Many people, when something occurs where they cannot make a Chapter 13 payment one month, will simply not pay it. This is a very bad idea. All you have to do is contact your attorney and ask them to file a Motion to Modify the Chapter 13 Plan. You will need to go to the office and supply the attorney with new, updated income and budget information, which explains why you cannot make your normal Chapter 13 payment, but it is well worth the 2 hours of time.

If you need to go into debt and purchase something on credit while you are going through a Chapter 13 bankruptcy, your attorney can file a Motion to Incur Debt for you. This will allow you the needed money to purchase the item. (Example: Sell one car and purchase another one.)