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How is a Chapter 13 bankruptcy case conducted?

Reorganization process of Chapter 13 qualifies wage earners to file bankruptcy

As a reorganization bankruptcy, a Chapter 13 petition filed in U.S. Bankruptcy Court is more complicated than a direct liquidation proceeding. It also takes several years to complete the court-ordered repayment plan required of Chapter 13 filers, rather than a few months as in Chapter 7 cases.

The crux of Chapter 13, often referred to as the "wage earner's bankruptcy," is to pay creditors a reduced percentage of what is owed based on what debtors can afford. Payments are to be paid during either a 36- or 60-month timeframe, depending on the income of debtors. Those with higher incomes usually have cases that last five years, rather than three.

Before a Chapter 13 begins, individuals must calculate their debt to determine their eligibility. There are limits on how much they may have in secured debt, which is tied to tangible assets, and unsecured debt such as credit card or medical bills. According to United States Courts, an individual's unsecured debts must be less than $360,475 and secured debts must be lower than $1,081,400 to qualify.

Chapter 13 filers do not have to relinquish their property to creditors, and have the court's protection against collection efforts and lawsuits for the duration of their cases.

Required steps of reorganization

Chapter 13 cases begin with a credit counseling course that must be completed within the six-month period prior to filing the bankruptcy petition. Debtors must also compile a comprehensive list of debts, assets, current income and expenses. In addition, they also need to calculate the value of their property to determine what is exempt from their repayment plan.

These documents are filed along with a repayment plan proposed by debtors based on the disposable income that remains after allowing for their basic living expenses. After the 341 meeting, in which the bankruptcy trustee and creditors may pose questions regarding the petition, Chapter 13 filers must attend a confirmation hearing. This determines whether the proposed payment plan is acceptable to the court.

A financial management course must be completed within 45 days after the 341 meeting before the trustee. Then, within 30 days of the confirmation ruling, payments begin under the plan approved by the court. In addition to paying unsecured creditors, the plan allows debtors to catch up on back payments on secured loans such as mortgages. Once the payment plan is completed, the court will discharge any remaining unsecured debts.

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