Chapter 13 bankruptcy is a reorganization proceeding intended for use by individuals seeking relief from consumer debt. According to Stephen P. Parsons, author of The ABCs of Debt, the new bankruptcy laws that took effect in 2005 are intended to force more consumers to file Chapter 13 reorganization (repayment) bankruptcy instead of Chapter 7 liquidation bankruptcy.
Bankruptcy Means Test Forces More Debtors into Chapter 13 Bankruptcy
Chapter 13 bankruptcy is similar to bankruptcy under Chapter 11 in that it is a reorganization proceeding. The new bankruptcy laws were written to ensure that debtors who were in a position to repay even a portion of their debts must do so rather than go through liquidation and forgiveness in Chapter 7 bankruptcy. Accordingly, many debtors who file for Chapter 7 bankruptcy end up having their cases converted to Chapter 13 cases.
An individual with a regular income who does not meet the criteria in the bankruptcy means test for filing Chapter 7 bankruptcy will have his or her Chapter 7 case dismissed unless he or she agrees to have the case converted to a Chapter 13 case. In a Chapter 13 bankruptcy, the debtor's income is used to fund a Chapter 13 plan for the repayment of debts.
What does "Regular Income" mean under the new Bankruptcy Laws?
Under the new bankruptcy laws, a debtor with regular income will likely be forced to file Chapter 13 bankruptcy as opposed to filing under Chapter 7. But what does regular income mean under the Bankruptcy Code? What if a debtor is retired or disabled and living on a fixed income, or is unemployed? Parsons notes that the term "regular income" is broadly interpreted to include traditional and nontraditional types of income.
Thus, a debtor on Social Security or pension benefits will qualify for Chapter 13 bankruptcy if his or her income is regular and stable. One who is unemployed at the time of filing for bankruptcy will be considered to have regular income so long as he or she has good prospects for obtaining employment in the near future. A debtor who is supported by a family member will qualify as having "regular income" as well.
How to File for Bankruptcy under Chapter 13
All individuals seeking debt relief through bankruptcy must first go through bankruptcy credit counseling. Thereafter, a Chapter 13 bankruptcy is begun by filing a petition in the appropriate federal court, usually in the district where the debtor has lived for at least 180 days prior to filing. Additionally, the debtor must file:
- A list of creditors.
- Schedules of assets and liabilities.
- A statement of financial affairs.
- A number of other documents depending on the circumstances.
The Chapter 13 Plan for Repayment of Debts
As Parsons explains, the Chapter 13 debtor must also file an official form calculating the debtor's disposable monthly income and a plan commitment period for paying off the debts. This is part of the Chapter 13 plan, under which the debtor must begin making payments within 30 days of filing the petition. The Chapter 13 plan runs three to five years under the bankruptcy trustee's supervision.
Because of the complexities involved in filing for bankruptcy, anyone considering bankruptcy should seek the advice and counsel of an experienced bankruptcy attorney.
Additional Resource: Ways to Avoid Bankruptcy
Source: Parsons, Stephen P. The ABCs of Debt. N.Y.: Aspen, 2009.
Disclaimer: This article is in no way intended as legal advice. For help with specific legal issues, one should contact a licensed attorney in one's own jurisdiction.
 |
 |
 |
 |
 |
