A Chapter 13 bankruptcy is essentially a debt settlement and reorganization program. What separates it from debt settlement businesses is the enforcement power it provides. Debt settlement, credit repair, and mortgage modification businesses rely on good faith and negotiation with creditors. Bankruptcy is Federal Law enforced by Federal Judges in Federal Courts. The Chapter 13 Trustee is part of the United States Department of Justice.
Chapter 13 bankruptcy stops your creditors from collection attempts. What does that mean for you? It means lawsuits are stopped cold. It means collectors stop calling you three times a day. Credit card bills stop. So do medical collectors. And the IRS. And the repo man. And payday loans. And foreclosures. And past-due child support collection. And mostly everyone else you owe money*. The phone stops ringing. The debt stops growing. Life starts getting back to normal.
A Chapter 13 bankruptcy starts by filing bankruptcy paperwork with the local bankruptcy court. The person filing the bankruptcy is called the “debtor”. Soon after the bankruptcy is filed, the court clerk will send notice out to all the debtor’s creditors.
The court clerk will also set a date and time for a creditor meeting. The debtor and debtor’s attorney attend this meeting at the Chapter 13 Trustee’s office. It is usually about 30 days after the bankruptcy is filed. It is rare for creditors to attend. It is generally an opportunity for the Trustee to take testimony and verify that the information in the bankruptcy paperwork is correct.
The debtor starts making payments to the Trustee 30 days after the bankruptcy is filed. The payment amount is determined by the debtor and attorney, usually before the bankruptcy is filed. The Trustee takes the payment and distributes the money to the creditors that need to be paid through the bankruptcy.
The debtor makes payments for 36-60 months. At the end of the bankruptcy, the debtor is current on the debts that needed to be paid. Everything else is wiped out. A normal repayment plan wipes out your unsecured debt (credit cards, medical bills, etc.), pays most of your attorney fees, and pays important past-due debts (mortgage, recent taxes, child support, vehicle payments, etc.).
A Chapter 13 bankruptcy can be a good option for someone who is
- threatened with foreclosure on their homestead
- significantly upside down on a car they purchased more than 30 months ago
- burdened by a federal tax lien larger than their combined assets
- behind on child support
- carrying more credit card debt than they can pay over the next 3 years
- able to make their regular mortgage payment and living expenses, but can’t catch up on the past due amounts.
The explanation above is simplified. A Chapter 13 bankruptcy is actually a complicated legal proceeding. And, the rules vary from Trustee to Trustee. In the area I practice (Dallas / Fort Worth) a Chapter 13 bankruptcy can be assigned to the Dallas Trustee (in Irving), the Plano Trustee, or one of two Fort Worth Trustees (both in North Richland Hills). Which of these will force you to make your trustee payments by wage withholding? Which will let you keep your tax refund? Which will soon require conduit mortgage payments? I do not recommend you try a Chapter 13 without an experienced attorney.
Thanks for reading;
*Note that I said “mostly everyone else you owe money”. Some creditors aren’t affected by a Chapter 13 bankruptcy. The most common is a landlord attempting to evict. If a landlord has an eviction judgment before a bankruptcy is filed, bankruptcy will not stop the eviction. Criminal proceedings (including “hot check” prosecutions”) are not stopped by a bankruptcy. And, some court proceedings or license restrictions regarding paternity, child support, divorce, and domestic violence aren’t stopped by bankruptcy. Most of the rest of the exceptions are rare in consumer bankruptcies, so we won’t go into them here.