After chapter 7 bankruptcies, the most commonly filed one is chapter 13. However, it does not liquidate any of the assets of the bankruptcy petitioner. Debtors who choose this type of bankruptcy are allowed to retain all of their properties, regardless of the fact whether or not they exempted by the law. The entire process of chapter 13 bankruptcies is pretty more complex than chapter 7 and is costlier as well due to additional expenses like attorney fees.
Chapter 13 bankruptcy requires full dedication
The term of chapter 7 bankruptcies is shorter as compared to chapter 13 bankruptcies which don’t last for more than 6 months. Alternatively, chapter 13 bankruptcy is a long-term debt relief process and usually has a term of 3-5 years. It is a lengthy process because it requires petitioners to make monthly debt payments. These monthly payments are received by the chapter 13 trustee who is assigned by the competent bankruptcy court.
However, the repayment schedule varies and that is dependent on an individual debtor’s disposable income. The court decides the repayment tenure after evaluating whether or not a debtor’s income lies above or below the median income, as per his/her state of residence.
Importance of Chapter 13 trustee
Just like chapter 7 chapter, chapter 13 bankruptcies are also conducted under the watchful eyes of a court appointed official who is known as chapter 13 trustee. These trustees act as the medium of contact between the debtors and their creditors.
A chapter 13 trustee will assess debt repayment plan created and proposed by the debtors. If a trustee considers the repayment plan to be inappropriate, then he/she can challenge the viability of the same in the bankruptcy court.
On receiving the consent of the bankruptcy court, the trustee will become a mediator between chapter 13 petitioners and their creditors who’ll receive the loan repayments. In this case, debtors are required to deposit their monthly payments with the trustee.
It is the job of the trustee to distribute the received debt payments amongst the respective creditors. This should be done in accordance to the terms of the court-approved debt repayment plan.
Chapter 13 debt repayment plan essentials
A bankruptcy court will approve a chapter 13 plan only when it deems fit. One of the foremost requirements for such a plan to get the court’s approval is its good faith appeal.
This implies that debtors should have the intention to oblige with the terms of repayment as mentioned in the plan and should not misrepresent facts about everything related to their finances. The court wouldn’t tolerate any kind of fraudulent activities of the debtors and may dismiss their bankruptcy petition, if anybody is found to be guilty of doing so.
In addition to that, the repayment plan proposed by the debtors should serve the best interest of their creditors. Debtors who file chapter 13 bankruptcy petitions are expected to make debt payments just the way they would in case of chapter 7 bankruptcies.
These payments will mostly be made to the unsecured creditors. As a result of this rule, passing such a test is said to be an easy one to ace. On the other hand, they’ll also have to pass a best efforts test. In order to pass this test, debtors are required to pay their creditors ten times the amount of their disposable income.
Chapter 13 repayment plan – How it works
This type of debt repayment plan can also be simply referred to as ‘payment plan’. Through such a payment plan debtors can reorder their financial obligations over an extended repayment period.
However, the necessary monthly payable amount is calculated after an individual bankruptcy petitioner passes the means test. In reality, a means test in bankruptcy helps in to determine the disposable income of the debtors. Unsecured creditors (like credit cards, payday loans, etc.) may not receive any payments at all that is also decided on the basis of the means test.
Chapter 13 Bankruptcy