Understanding Chapter 13 Bankruptcy
Understanding how Chapter 13 bankruptcies work may help people seeking to regain control of their finances to determine if it is the right option for them.
The loss of a job, a sudden illness or injury, or any other number of factors may cause people in New Mexico and elsewhere to fall behind on their financial obligations. When, despite having regular income, people find themselves struggling with debt, they may consider petitioning for Chapter 13 bankruptcy. In fact, the Administrative Office of the U.S. Courts reports that 38.36 percent of the consumer bankruptcies filed in 2017 were Chapter 13 cases. Not for every situation, understanding how this debt relief option works may help people determine if it is the right course of action for their circumstances.
Qualifying for Chapter 13
Individual debtors and married couples may qualify for Chapter 13 protection, given their secured debts do not exceed $1,184,200 and they have less than $394,725 in unsecured claims. Those seeking this type of relief must also have completed credit counseling during the 180 days preceding their filings. Further, they cannot have voluntarily dropped another case within the last 180 days after creditors acted to recover property or had a previous petition dismissed for willful failure to appear before the court or comply with court orders.
The repayment plan
Along with their petitions or within 14 days of filing for Chapter 13 bankruptcy, people must submit their proposed repayment plans to the court for approval. These plans must provide for regular payments to be made to a court-appointed trustee over a period of three or five years. The trustee is responsible for distributing the payments to people’s creditors in accordance with the terms spelled out in their repayment plans.
Handling of creditors’ claims
For the purpose of bankruptcy cases, debts may be classified as one of three claim-types – priority, secured or unsecured. Priority claims are those that are granted special status under the law, and may include the court costs associated with people’s bankruptcy filings, taxes and other debts. Secured debts are claims for which debtors have put up property as collateral, while unsecured claims are debts that do not grant creditors the right to collect against specific assets or property.
With few exceptions, Chapter 13 repayment plans must pay back priority claims in full. Should they wish to retain the property used as collateral for secured debts, people must provide for the full payment of secured claims in their plans. Provided they allow for the payment of all their projected disposable income toward their debts over the plan’s course, people may not need to include payment in full for unsecured claims in their repayment plans. However, unsecured creditors must receive as much through Chapter 13 plans as they would have received through a Chapter 7 liquidation of the debtor’s assets.
Following through with the plan
No later than 30 days after filing their petitions, those seeking Chapter 13 bankruptcy must begin making payments to their case trustees. This is the case even if the court has not yet approved the plan. Debtors may choose to pay these installments directly or to have them automatically deducted from their paychecks. Should they fail to make their regular payments, people’s cases may be dismissed or converted to Chapter 7 cases.
Working with a legal representative
For people in New Mexico and elsewhere who are struggling with debt, navigating the legal complexities associated with filing for bankruptcy may further complicate an already difficult time. Therefore, those who are seeking a fresh financial start may find it helpful to consult with an attorney. A lawyer may help them understand their options and determine the best course of action given their situations, as well as guide them through the legal process.