10 Essential Chapter 13 Bankruptcy Terms
Many of us aren’t aware of the intricacies of bankruptcy law. Fewer are aware of the existence of multiple chapters of bankruptcy, or of their different functions. We aren’t all qualified to be bankruptcy attorneys, after all – not to worry, though. In this list, you’ll find terminology that may demystify Chapter 13 bankruptcy in particular.
Chapter 13 bankruptcy is often referred to as the “Wage Earner’s Bankruptcy”, since it does not rely on the liquidation of assets in order to pay back lenders. Since most people would assume that all bankruptcy includes liquidation, that begs the question: what makes Chapter 13 bankruptcy unique?
Let’s find out.
- Chapter 13 Bankruptcy: Unlike Chapter 7 bankruptcy, which liquidates non-exempt assets to pay creditors, Chapter 13 bankruptcy allows the debtor to retain their assets and repay creditors over a period, typically 3-5 years. It’s often chosen by individuals who have regular income but are struggling with unmanageable debt.
- Automatic Stay: This is a fundamental aspect of the bankruptcy process. The automatic stay immediately stops most creditors from seeking to collect debts. It prevents foreclosures, evictions, wage garnishments, and similar actions while the bankruptcy case is ongoing.
- Bankruptcy Trustee: In a Chapter 13 case, the bankruptcy trustee administers the case and the repayment plan. The trustee reviews the debtor’s plan, makes recommendations to the court, and disburses payments to creditors.
- Bankruptcy Estate: When you file for bankruptcy, virtually all your assets become part of the bankruptcy estate. Under Chapter 13, you can keep all your property, but it may affect how much you must repay creditors.
- 341 Meeting of Creditors: Shortly after you file for bankruptcy, the court will arrange a “341 meeting” (named after Section 341 of the Bankruptcy Code). It’s a meeting between you, the trustee, and any creditors who wish to attend, where you answer questions about your financial situation and bankruptcy papers.
- Confirmation Hearing: The court holds a hearing to decide whether to confirm, or approve, your proposed repayment plan. If confirmed, all parties, including creditors not in favor of the plan, must abide by it.
- Debt Discharge: This is the ultimate goal of filing bankruptcy. Once you’ve completed your Chapter 13 repayment plan, the court discharges the remaining eligible debts. However, not all debts can be discharged; certain tax debts, child or spousal support, and student loans typically survive bankruptcy.
- Cramdown: This provision allows a debtor to reduce the amount owed on a secured debt to the value of the collateral securing it. For instance, if a car loan balance is $15,000, but the car is worth only $10,000, a cramdown can reduce the debt to $10,000. However, cramdowns have specific requirements and are not available for all types of debts.
- Disposable Income: In the context of Chapter 13, disposable income refers to income left after deducting allowed expenses and payments for secured and priority debts. It’s significant because your disposable income often determines how much unsecured creditors get paid in your repayment plan.
- Non-exempt Property: These are assets that are not protected by a bankruptcy exemption. In a Chapter 7 bankruptcy, non-exempt property can be sold to repay creditors. In Chapter 13, the value of non-exempt property often influences how much you must repay unsecured creditors.
Understanding these terms can be instrumental in effectively navigating the Chapter 13 bankruptcy process. However, it’s a complex area of law, and it’s crucial to engage the services of a knowledgeable bankruptcy attorney who can guide you through this journey. Remember, bankruptcy isn’t just about eliminating debt; it’s about understanding the process, making informed decisions, and ultimately achieving a fresh financial start.