Chapter 13 Bankruptcy: How Does it Work?

How Does Chapter 13 Bankruptcy Work?

1. Determining Chapter 13 Eligibility

Chapter 13 bankruptcy isn't for everyone, and depending upon your income levels and assets, it may not be an option for you. Chapter 13 Bankruptcy in Illinois requires you to use your income to repay some or all of your debt, which means that you'll have to prove to the court that you can afford to meet your payment obligations.

This is done in a ‘Means Test’, which determines your eligibility by calculating your current monthly income over the 6 months prior to your filing date, and your disposable income, after subtracting certain expenses and monthly payments for debts you would have to repay in Chapter 13.

2. Getting Credit Counseling

In 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act set in place a requirement that anyone who plans to file for bankruptcy must complete a $50-$100 credit counseling course at least 180 days before they file for bankruptcy. The reason for this credit counseling is to have the opportunity to look at your financial situation with the help of a financial counselor.

Counseling can be done by telephone, on the internet or in person. It is required that the counseling be done by an approved educator. You can find a list of approved courses at the U.S. Trustee Program. Your Chicago Chapter 13 bankruptcy lawyer can also recommend credit counselors.

3. Chapter 13 Bankruptcy Trustee

When you file for Chapter 13 Bankruptcy, a bankruptcy trustee will be appointed to administer your case. A Chapter 13 trustee is an impartial 3rd party who essentially acts as a go-between for you and your creditors. Dealing with a trustee in bankruptcy is one of the steps in the process. The trustee will review your income and debt, and your bankruptcy plan and collect and distribute your payments.

They then organize a payment plan which has to be approved by the bankruptcy court. Once they plan is approved and you begin making payments, the trustee receives a payment/commission from these payments. They exert a good deal of control over your bankruptcy case, so it’s important to follow their directions closely, with the help of your attorney.

4. Filing Your Case

The bankruptcy attorney files Chapter 13 Bankruptcy plan when the bankruptcy petition is filed. The plan will propose to pay a certain amount of money per month to the Chapter 13 trustee, based on the debtor's income and certain allowable expenses.

5. Meeting of Creditors

Between 21 and 50 days after you file the Chapter 13 petition, the Chapter 13 trustee will hold a meeting of creditors. During this meeting, the trustee places the debtor under oath, and both the trustee and creditors will review the plan and may ask questions.

6. Discharge

When all payments are made and disbursed to creditors according to the plan, a discharge will be issued eliminating any remaining unsecured debt that is discharge-able. Before you can receive a discharge, you must be able to show the court that you are current on your child support and/or alimony obligations and that you have completed the aforementioned budget counseling course. There may be an effect on your credit scores. Find out more about what to expect here.