In 2009, there were more than 1.4 million bankruptcy filings in the United States. Most personal bankruptcies are Chapter 7 filings. But with scores of people facing foreclosure, more individuals are filing Chapter 13, because it allows them to keep their homes.
Here are some of the important facts you need to know about filing Chapter 13, especially if you need to stop foreclosure.
Unlike Chapter 7, which completely wipes out personal debts such as credit card bills and installment loans, Chapter 13 is a way to re-organize your finances and pay off your debts (including any overdue house payments) over a period of 3 to 5 years. Chapter 13 is also known as a wage earner’s plan, because individuals in this form of bankruptcy must have a regular income and provide a plan to the court showing that the person can repay all or part of his/her debts.
How Much Does It Cost?
Bankruptcy rules and fees vary from state to state. However, it will probably cost you at least $1,000 (and sometimes as much as $2,500 or so) to hire an attorney and file for protection from your creditors. Bankruptcy laws are complicated, and the vast majority of people should have a qualified bankruptcy attorney handling the process.
The Chapter 13 Process In a Nutshell
Here is a quick and dirty description of what happens when you file Chapter 13.
- Before you file, you must get pre-bankruptcy credit counseling. This can be done in person, over the phone or on line – typically in about 60 minutes.
- To start the actual filing, you must first gather a slew of information, including your creditors’ names, addresses, and the amount of debt you owe to each.
- You must also put together a variety of “schedules,” namely, an income and expense schedule, a schedule outlining your assets and liabilities, and a schedule showing unexpired leases and executory contracts (i.e. those where you have a material unperformed obligation).
- Lastly, you must provide the Bankruptcy Trustee with a statement about your financial affairs. Taken together, these documents will give the Chapter 13 Trustee a sense of your overall financial picture, including one key element: the amount, source and frequency with which you receive any and all income.
Co-Signers are Protected and Do Not Have to File Bankruptcy
If you’re contemplating bankruptcy as a way to stop foreclosure, and your spouse, a relative or a friend is a co-signer on the mortgage, that individual does not have to also file Chapter 13. However, you will have to also include his or her income and expenses in your schedules and statement of financial affairs, so that the Trustee can accurately assess financial responsibility and ability to repay the debt over time.
- Next, you or your attorney will fill out mandatory paperwork for your petition or case file. You create a repayment plan showing how you intend to eliminate all or some of your debt for a maximum period of five years; this repayment plan gets filed with the closest federal court.
- The court then issues an “automatic stay” protecting you from further actions by your creditors. This means they can’t initiate or continue any collection activity against you, including foreclosure, lawsuits, repossession, wage garnishments, or even just harassing phone calls. The good news for co-signers is that with a Chapter 13 petition, the filing also provides a “co-debtor stay,” which means that creditors can’t try to collect a consumer debt from another individual who is also liable with the debtor for the debt.
- In about 30 days after your filing, you must attend a meeting of your creditors. If any show up, they can challenge your claim that you are unable to pay your debts.
- If all goes well, the bankruptcy judge formally approves your debt reorganization plan, after which you start making payments within 30 days. Those payments continue until you complete your Chapter 13 plan.
Is Bankruptcy Really a “Fresh Start?”
While you are in Chapter 13, you are still required to make your monthly mortgage payments on a timely basis. If you don’t, your lender can get that “automatic stay” lifted by the court and can re-initiate foreclosure.
Finally, realize that while bankruptcy is often touted as a “fresh start,” it is not without consequences. Specifically, filing Chapter 13 bankruptcy will hurt your credit rating and stay on your credit report for 7 years after it is discharged. In Chapter 13, your bankruptcy is “discharged” after you complete making all payments. Chapter 7 bankruptcy filings stay on a person’s credit report for 10 years. But the time period is shorter for Chapter 13 filers since those individuals have spent years repaying all or part of their debts.
Again, this information is educational in nature, and is summarized greatly for brevity. Anyone considering bankruptcy should seek the services of an experienced attorney skilled in bankruptcy law.