Chapter 13 bankruptcy nationally a less commonly filed form of bankruptcy, and it isn’t what most people think about when they hear the word “bankruptcy.” Most folks think about Chapter 7 or straight bankruptcy when they hear the word bankruptcy. In Alabama, Chapter 13 bankruptcy is a more popular choice. Nearly ⅔ of bankruptcy filings in Alabama last year were Chapter 13 cases. Alabama is one of just 8 states that saw more Chapter 13 filings than Chapter 7 filings in 2019. Other states favoring Chapter 13 during that time are all Southern states:
- Arkansas: 52% Chapter 13
- Georgia: 57% Chapter 13
- Louisiana: 69% Chapter 13
- Mississippi: 53% Chapter 13
- North Carolina: 60% Chapter 13
- South Carolina: 60% Chapter 13
- Tennessee: 58% Chapter 13
Thus far, the 2020 breakdown is similar in these states.
Still, most people seeking solutions to financial difficulties have only a very general understanding of Chapter 13 bankruptcy. While the bankruptcy discharge–elimination of the legal obligation to pay certain debts–is the centerpiece of a Chapter 7 case, Chapter 13 is built around a three to five year repayment plan.
Who Files Chapter 13?
Chapter 13 bankruptcy isn’t right for everyone. Some common reasons people choose Chapter 13 over Chapter 7 include:
- The need to manage secured debts, which can’t be discharged in Chapter 7 unless the property is surrendered
- Having too much income to qualify for Chapter 7
- Having non-exempt assets they want to keep
Chapter 13 filers don’t have to pass a means test like those filing Chapter 7, but there are some limits. First, the Chapter 13 filer must have income that will allow for regular monthly payments to the trustee. There are also limits on the amount of debt that can be included in a Chapter 13 plan. However, the limits are high and aren’t an issue for most people considering bankruptcy. In 2020, the limits are $419,275 in unsecured debt and $1,257,850 in secured debt.
The Chapter 13 Repayment Plan
At first glance, it may not be clear how a payment plan helps. Most people at the point of exploring bankruptcy as an option have already juggled payments in every way they could imagine. But, a Chapter 13 plan can offer several advantages, including:
- The opportunity to catch up past-due balances over time without mounting late fees, collection actions, and threats such as repossession and wage garnishment
- Possible adjustments in certain loan balances, such as a reduction in the outstanding balance on certain car loans and other secured loans
- Paying only a pro-rata amount of your unsecured debt resulting in possible discharge of a portion of unsecured debt on completion of the plan
Here’s how it works:
A proposed plan is filed with the bankruptcy petition or within 14 days of filing. The plan must generally be for three years for below-median earners and five years for above-median earners, though there are a few possible exceptions.
The plan sets forth what the petitioner will pay to each creditor across the life of the plan, and what the fixed monthly payment to the trustee for distribution to creditors will be. Debt falls into three categories, and each is treated a bit differently:
- Priority debt, such as most types of tax debt: must be paid in full through the plan
- Secured debt: at least the value of the asset serving as security must be paid back through the plan, and in some cases the full outstanding balance on the loan, if the bankruptcy filer wants to keep the property
- Unsecured, non-priority debt: depending on the debtor’s disposable income, may be paid in full, in part, or not at all
The bankruptcy attorney’s fees are often built into the plan, and the bankruptcy trustee is paid on a percentage basis.
Creditors and the bankruptcy trustee will have an opportunity to object to the plan. Some possible reasons for objection include:
- The trustee or a creditor disagrees with the value the petitioner has assigned property that serves as collateral on a secured loan
- The plan proposes to pay less than 100% of unsecured debt, but not all disposable income is committed to the plan
- The trustee or a creditor disagrees with the classification of a debt
- Unsecured creditors will not receive at least as much as they would have in a Chapter 7 case
- The plan appears to be unsustainable due to insufficient income
The trustee may object to plan confirmation for administrative reasons, as well. For instance, if the petitioner hasn’t provided adequate income documentation, the trustee may be unable to evaluate the plan.
Protecting Against Objections
Of course, the better prepared you are, the less likely it is that a creditor or the bankruptcy trustee will raise a successful objection to your plan. That means providing complete and accurate documentation to your attorney and the bankruptcy trustee, not attempting to hide anything, and working with your bankruptcy lawyer to ensure that the plan fulfills all of your obligations.
The attorneys at Bond & Botes have decades of experience helping people in Alabama, Mississippi and Tennessee navigate the U.S. Bankruptcy Courts. To learn more about how we may be able to help you take control of your debt and build a better financial future, schedule your free consultation right now. Just call 877-581-3396 or fill out the contact form on this page.
Amy K Tanner is a shareholder in several of the Bond & Botes Law Offices. She holds a Bachelor of Science from Auburn University at Montgomery, and a Juris Doctorate from Thomas Goode Jones School of Law. She focuses primarily on consumer bankruptcy law in the Huntsville and Decatur offices.Read her full bio here.