What Is Chapter 13 Bankruptcy?
While no one ever intends or wants to file for bankruptcy, there are times when a bankruptcy filing can be the best course of action, giving debtors a fresh financial start. Chapter 13 Bankruptcy is sometimes known as a “wage earner’s plan” because it enables those with a regular income to develop a plan to repay their debt—in part or in full. Debtors will propose a plan under which they will make monthly installments to their creditors over a period of three to five years.
If the debtor has a monthly income that is less than the applicable state median income, the repayment plan will be for three years unless the court approves a longer period “for cause.” If the debtor has a monthly income that is higher than the state median income, the plan will usually be for five years. During the period of time under which the debtor is making regular monthly payments, creditors are prohibited from contacting the debtor.
Why Choose Chapter 13 Bankruptcy Over Chapter 7 Bankruptcy?
Although many people believe Chapter 7 bankruptcy is “better” than Chapter 13 bankruptcy—because Chapter 7 totally wipes out qualifying debt with no repayment plan—it really is not that simple. Each type of bankruptcy has unique tools that can help an individual debtor solve his or her specific financial issues. As an example, a debtor whose primary goal is to save his or her home from foreclosure is more likely to benefit from Chapter 13 bankruptcy. Other times, Chapter 13 bankruptcy could be the only viable option when the debtor does not qualify for Chapter 7 bankruptcy.
If your current monthly income is more than the Kentucky median income for a household your size, you will likely have to file for Chapter 13 bankruptcy. If you take the means test (which determines your disposable income after subtracting allowed expenses and monthly debt payments) and your disposable income exceeds the set limits, you are ineligible to file for Chapter 7 bankruptcy. The means test can be complex, making it essential that you have an experienced Kentucky bankruptcy attorney help you make this important determination.
Even if you happen to be eligible to file for Chapter 7 bankruptcy, you might be better off filing for Chapter 13. This could be true if you are behind on your mortgage or your car loan. Chapter 13 bankruptcy allows you to make up these missed payments over time, thus keeping your home and vehicle. If you have debt that is not dischargeable under Chapter 7 bankruptcy (IRS debt, state tax obligations, spousal support arrears), you can use Chapter 13 bankruptcy to pay the debts over a period of three to five years. Finally, the automatic stay available in Chapter 13 bankruptcy stops collections and prevents garnishment of your wages or bank account levies.
What are Chapter 13 Exemptions in Kentucky?
Each state offers certain “exemptions” for those filing for Chapter 13 bankruptcy. There are also federal exemptions allowed when filing for Chapter 13 bankruptcy. In the state of Kentucky, the debtor is allowed to choose federal or state exemptions. The exemptions allowed in the state of Kentucky include:
- Household furnishings and clothing—up to $3,000
- Tools, equipment, and livestock used in farming—up to $3,000
- Equity in one motor vehicle—up to $2,500 (including accessories and one spare tire)
- Any prescribed health aids for you or your dependent
- Any crime victim reparation
- Spousal support
- A wrongful death award from a person upon whom you were dependent
- Up to $7,500 of value in a personal injury reward
- Any personal injury award for loss of future earnings
- Certain pensions and retirement funds (police and firefighter pensions, ERISA-qualified retirement accounts, teacher pensions, state and county employee pensions)
- Public assistance, unemployment and workers’ compensation benefits
- Tools of the trade—up to $300 in tools used in your trade for a skilled tradesperson or up to $1,000 in library books, office equipment, instruments and furnishings for an attorney, minister, physician, dentist, or veterinarian.
- Life insurance proceeds in some cases
- The Wildcard of up to $1,000 in value in any real or personal property
- The homestead exemption—up to $5,000 in equity in any real or personal property in the state used as a permanent residence
Married couples who jointly file for Chapter 13 bankruptcy in Kentucky may double the exemption amounts.
What Happens When a Chapter 13 Bankruptcy is Discharged?
Once your Chapter 13 bankruptcy repayment plan is completed, you will receive a discharge order that wipes out the remaining balance of any qualifying debt. A Chapter 13 discharge tends to be broader than a Chapter 7 discharge because it wipes out some debts that are not non-dischargeable under Chapter 7.
What Debts are Paid Under Chapter 13 Bankruptcy?
Under Chapter 13 bankruptcy, not all debts are treated equally; rather, they are categorized. These categories will determine whether the debt must be paid in full or can be discharged. First, it must be determined whether each debt is secured (guaranteed by collateral) or unsecured. Unsecured debt is then divided into “priority” and “nonpriority.”
Priority unsecured debts are paid before non-priority unsecured debts—and are not dischargeable. Nonpriority unsecured debts will be paid only if there is money left over and the debt is considered dischargeable. The secured debt must be paid as agreed, or the collateral must be surrendered. However, long-term debts (like a 30-year mortgage) may not have to be paid in full under Chapter 13. Student loans are a notable exception—you will remain responsible for those debts.
How Will a Chapter 13 Bankruptcy Affect Your Credit?
Many consumers who are considering filing for bankruptcy wonder how it will affect their credit. First, it is important to recognize that missed payments, defaults, repossessions, and lawsuits will damage your credit, and maybe even more difficult to explain to a future lender than explaining a Chapter 13 bankruptcy. Chapter 13 bankruptcy filings remain on credit reports for up to 10 years, although do not be surprised if you begin receiving credit card offers as soon as your Chapter 13 bankruptcy repayment plan is paid and discharged.
Can Chapter 13 Bankruptcy Help with IRS Debt?
How your tax debt will be treated under Chapter 13 bankruptcy depends on whether the tax debt is considered a priority or nonpriority obligation. Priority tax debts are not dischargeable in bankruptcy and must be paid in full through your Chapter 13 repayment plan. Nonpriority tax debts are treated the same as other unsecured debts and wiped out upon discharge. Priority tax obligations include recent income tax obligations, property taxes incurred one year prior to the bankruptcy filing, payroll taxes you were required to withhold or collect, certain employment taxes, excise taxes, customs duties, and penalties related to non-dischargeable taxes.
Older income tax obligations may be able to be discharged under Chapter 13 bankruptcy if they qualify as nonpriority tax debts. Taxes are generally considered nonpriority if the tax was due three years or more prior to your bankruptcy filing, you filed the tax return at least two years prior to filing for bankruptcy, or if the IRS has not assessed your liability for the tax debt within the 240 days prior to your bankruptcy—and if you did not commit fraud or willful tax evasion.
What is a Chapter 13 Hardship Discharge?
Under certain circumstances, if you are in the process of paying your three to five-year Chapter 13 bankruptcy repayment plan and you experience a significant change in circumstances that prevent you from being able to ask the court for a hardship discharge. To receive a Chapter 13 hardship discharge, you must file a motion with the court and satisfy these three conditions:
- You failed to complete your payments due to circumstances beyond your control;
- Your unsecured creditors have already received as much money as they would have if you had filed for Chapter 7 bankruptcy, and
- It is not feasible to modify your current Chapter 13 repayment plan.
One of the circumstances that could allow you to qualify for a Chapter 13 hardship discharge would be the loss of your job (if it is a permanent loss rather than a temporary lay-off). The circumstances must be serious and permanent in order for you to qualify for a Chapter 13 hardship discharge. A Chapter 13 hardship discharge does not eliminate priority obligations, secured debts, student loans, and any other debts that would be non-dischargeable in a Chapter 7 bankruptcy.
The Chapter 13 Process
A Chapter 13 bankruptcy case begins with the filing of a petition in the bankruptcy court where you live. You will file schedules of assets and liabilities, a schedule of current income and expenditures, a schedule of executory contracts and unexpired leases, and a statement of financial affairs. You will also be required to file a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling. You will be required to submit evidence of payment from your employer and a copy of your tax return for the most recent tax year, as well as any tax returns filed during the case. A list of all creditors, along with the amount and nature of their claim, a list of your property, a detailed list of your monthly living expenses, and the source, amount, and frequency of your income. The process for filing for Chapter 13 bankruptcy in the state of Kentucky is complex and time-consuming. Having an experienced Kentucky bankruptcy attorney by your side can make all the difference in the success of your bankruptcy filing.
Getting Help with Your Bankruptcy Filing from the Christopher Kurtz Law Office
The Christopher Kurtz Law Office was founded in 1966; over the past twenty-five years, Christopher Kurtz Law Office has assisted at least a thousand Kentucky bankruptcy filers. Today, we are a boutique firm that focuses on the core values of honesty, never compromising the truth. We are passionate about helping residents of Kentucky solve their financial troubles and believe in educating clients going through the process in order to alleviate their anxiety. When you choose the Christopher Kurtz Law Office, you can expect individual attention and affordable representation. We are located in Louisville, dealing primarily with the western district of Kentucky Bankruptcy Court Louisville Division. Contact the Christopher Kurtz Law Office today for exemplary Chapter 13 bankruptcy filing representation.
