California Bankruptcy: Chapter 13 Basics

Chapter 13 may be an option if you are facing a foreclosure. By filing a petition for Chapter 13 bankruptcy, foreclosure proceedings will automatically be stayed (stopped, delayed).

Chapter 13 is the “reorganization” chapter of the Bankruptcy code wherein you propose a “plan” for restructuring your debts.  This is often referred to as “Individual Debt Adjustment” or “wage earner’s plan.” Chapter 13 serves to protect the debtor’s property from liquidation, as would occur in a Chapter 7 bankruptcy. The debtor is required to pay bills over a specified period of time, usually 3 to 5 years. During that time, creditors are restricted from pursuing collections, including contact, lawsuits and more. Foreclosure proceedings may also be stayed.

An individual with regular income may be eligible for a Chapter 13, even if he or she is self employed or operates an unincorporated business. A corporation or partnership is not eligible for Chapter 13.  If you are an individual with less than $307,675 in unsecured debt and less than $922,975 in secured debt, you may be eligible to file for Chapter 13.  Additionally, you must have received credit counseling from an approved agency within 180 days before filing.

Chapter 13 has many benefits to an individual who chooses to petition for this form of bankruptcy. First and foremost, it will stay foreclosure proceedings and may allow for you to pay delinquent mortgage payments over time.  Creditors will be unable to contact you or harass you about the money that you owe, and creditors will be prohibited from filing lawsuits against you or starting any other collection processes. Chapter 13 may be better for cosigners as well, offering them more protection than Chapter 7 proceedings.

A Chapter 13 acts like a consolidation loan, wherein the debtor makes a single payment to a Chapter 13 trustee. The trustee then distributes payments to different creditors accordingly. This payment is typically calculated as a net cash surplus. For instance, if you make $4,000 per month and use $3,500 for your living expenses, you may be required to pay that remaining $500 to the Chapter 13 trustee in order to pay the creditors. This payment plan will usually last 3 to 5 years.

Filing a petition with Bankruptcy Court for Chapter 13 is complex. A great deal of financial information is needed and it can be difficult to know what you will need to provide the Court with. By working with an attorney, you can ensure that your petition is filed properly and that you have the best chance at a brighter future.