Before we get into a discussion about Chapter 13 Bankruptcy, it is useful to know the broader context of the different types or “chapters” of bankruptcy. The term “chapter” here refers to the subsections of Title 11 of the United States Code. The most common form of bankruptcy in the United States is Chapter 7, which is also sometimes referred to as the straight or liquidation bankruptcy; the other form of bankruptcy that is available to individuals (singly or married) is Chapter 13, also known as a wage earner’s plan. Unlike Chapter 7, people who file bankruptcy under Chapter 13 restructure their debts and repay a portion of the amount owed through a Chapter 13 Plan. Despite the repayment aspect, there are several reasons a Chapter 13 filing might be preferred over a Chapter 7.
Pros and Cons of Chapter 13
There are several advantages and disadvantages to a Chapter 13. The biggest advantage is that you have much more flexibility in terms of what property you get to keep. Thanks to the very-powerful Kansas Homestead Exemption, you can claim your home as exempt property under both Chapter 7 and Chapter 13, but if your house is in actual foreclosure, only a Chapter 13 filing would allow you to make up the arrears and get current again. Under Chapter 13, you can save your house from foreclosure, you can save your car from being repossessed, and even some non-exempt property can be kept as long as the plan is still feasible. (More on that in a minute.)
Another lesser-known advantage of Chapter 13 bankruptcy is that the Automatic Stay also protects co-debtors, unlike in a Chapter 7 filing. Making too much money can sometimes disqualify people for a Chapter 7. Thankfully, those people are usually still able to file under Chapter 13.
The repayment Plan can be seen as either an advantage or a disadvantage. For those who feel a moral obligation to repay their debts, it’s comforting to know that they are still repaying at least a portion of what is owed. For those who want to just be done with their creditors, however, making Plan payments is sometimes seen as a disadvantage of Chapter 13 bankruptcies.
Another disadvantage is the requirement that the Plan be feasible. Feasibility refers to the statutory requirement that “the debtor will be able to make all payments under the plan and to comply with the plan.” Generally speaking, if the Plan will give the creditors their fair share, if the plan payments don’t exceed the debtor’s disposable income, and if the plan will not need to run for more 5 years, it’s considered feasible. Trustees and creditors can and do challenge the feasibility of plans, though, and if the judge determines that the plan is infeasible, the consequences range from having to sell additional assets to being forced into a Chapter 7 bankruptcy. An experienced Kansas bankruptcy attorney is an invaluable ally who can help ensure that your plan is feasible before you even file.
Also, there is no grace period or wiggle room when it comes to making Plan payments. Such rigid requirements can be a disadvantage for some filers, though automatic payment options can help make it less of a disadvantage.
How a Chapter 13 Works
In terms of logistics, Chapter 13 proceedings are fairly straightforward. First, the debtor files a bankruptcy petition along with the proposed repayment plan. Thanks to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), debtors start making plan payments within 30 days of filing, even though their plan has not yet been confirmed. Next is the 341 hearing, in which the debtor answers some questions under oath regarding their bankruptcy petition and their financial situation in general. After that is the confirmation hearing in which, if all goes smoothly, the judge will confirm the payment Plan. Then it’s up to the debtor to complete the plan by making timely payments for the length of time specified in the plan (usually 3-5 years). If a debtor successfully does that, he or she will then receive a discharge of their debts.
While a Chapter 13 filing is more involved than Chapter 7, it also includes several powerful protections and advantages that make it a better fit for some people considering bankruptcy. Only you can determine what’s best for your individual situation, but a qualified Kansas bankruptcy attorney can help you know what your options are and, more importantly, what some of the legal and financial consequences of those options could be. Contact us today if you’d like to learn more!by Adam Mack, J.D.Hillary Stirling, research assistant
These articles are for general informational use and do not constitute legal advice. Since laws change over time, it’s possible some articles are out of date and for that reason, we make no representation that the articles are fully accurate. For actual, up-to-date legal advice (including a free consultation), please contact us!