Chapter 13 bankruptcy is sometimes referred to as a reorganization bankruptcy. You set up a three- to five-year payment plan to reduce or pay off your debt. The court reviews your assets and income when deciding whether to approve your plan, and the plans don't leave a lot of room for luxuries.
Chapter 13 cases require a lot of motivation to carry through three to five years of voluntary austerity, but that's just one reason they fail. Learn whether Chapter 13 is worth it and why there's a low success rate with this type of bankruptcy.
Emotions, Fortitude, and Motivation
Chapter 13 is challenging. The pre-petition prep process is probably the most emotionally wrenching period of bankruptcy. Debtors (those filing for bankruptcy) may be asking themselves:
- Will this Chapter 13 save my house (or car)?
- Can I afford the payments?
- Why do I have to gather all of this information?
- Will the court approve my plan?
- Am I doing the right thing?
- What if (my boss, my neighbors, the PTA)finds out?
Chapter 13 isn't easy to carry out, and many things happen along the way that could derail a case.
Lack of Resources
Many Chapter 13s are filed to stop a foreclosure or some other unwanted event like a car repossession or trial on a lawsuit over a debt. Often, clients don't consult an attorney until the very last minute, which doesn't give the attorney much time to review theclient's financials before the case must be filed. That has to wait until later when they're gathering all of the information needed for the bankruptcy schedules.
Sometimes it's not until the attorney has access to the particulars on income and expenses that they see that the client can't afford to keep the house or late model car.
Disruption in Income
Any disruption in the flow of income, like illness or job loss, will make it very difficult to keep or get back on track with a Chapter 13 repayment plan. Children are born or their needs change and marriages begin and end.It's hard to go five years without credit, major car repairs, replacement of an appliance, insurance deductibles,emergency travel, or even a vacation. While some of these items can be built into a Chapter 13 budget, but there's not much room for savings. Creditors don't like it when you hold back money that you could be paying them.
Clients also get tired and want out. Again, this is a function of time as much as anything else. Five years on a strict repayment plan is exhausting. Many clients decide that it's just not worth it, especially if they filed Chapter 13 to save an asset like a house.
Filing Without an Attorney
According to the United States Courts, about 9% of bankruptcycases arefiled by debtors pro se (meaning on their own without attorney assistance).
It's possible to get through a Chapter 7 case without an attorney, but not advisable. Self-filed Chapter 13 cases are rarely successful. Most don't get beyond the plan confirmation stage, if they get that far. Chapter 13 plans are subject to provisions like the "Best Interest of Creditors Test," the "Good Faith Test,"and "Chapter 13 feasibility." Experienced bankruptcy lawyers, trustees, and judges argue over these provisions all the time, so they would be extremely challenging for a layperson to navigate.
This is borne out in a study conducted by the Bankruptcy Court for the Central District of California. The Central District has a particular interest in this issue because it has more pro se filers than any other district in the country. The 2018 study found that approximately 63.8% of pro se Chapter 7 filers obtained a discharge (compared with 94.1% of those represented by an attorney).Less than 3% of those filing Chapter 13 pro se were able to get their repayment plans confirmed (compared with 69.1% of those represented by an attorney).
Note
Filers without attorneys are more successful with Chapter 7 cases because in many ways, they're simpler. There's no payment plan to negotiate; you either meet the means test or you don't.
Buying Time
There are also legitimate strategic reasons to leave Chapter 13 before the payments are completed.
Chapter 13 debtors file for any number of reasons. Many fileChapter 13 to take advantage of the automatic stay, which halts collection actions, without any intention of actually completing a case. Common reasons to file with no intention of completing the payment plan include:
- Having time to sell property
- Slowing down a lawsuit and negotiating a settlement
- Spreading out attorney fees through plan payments
- Managing student loans.
Not all of the debtors in those cases would necessarily benefit from completing a payment plan and receiving a Chapter 13 discharge. What they needed was time, and filing Chapter 13 provided it.
FAQs
In most cases, failure is due to one of several reasons: Life circ*mstances. Not having the guidance of an experienced bankruptcy attorney. Over-ambition.
Why do most Chapter 13 bankruptcies fail? ›
People who attempt to wade the rough waters of chapter 13 without the benefit of a lawyer rarely succeed. The last numbers I saw told a grim tale – less than 1% of cases where debtors were not represented by a bankruptcy lawyer were successful in having their plan approved by the court.
Why would Chapter 13 be denied? ›
While a variety of objections may be made, the most frequent ones are that payments offered under the plan are less than creditors would receive if the debtor's assets were liquidated or that the debtor's plan does not commit all of the debtor's projected disposable income for the three or five year applicable ...
Why would Chapter 13 be dismissed? ›
Here are the most common reasons for Chapter 13 bankruptcy case dismissals: Missing court deadlines. Failing to pay the court filing fees. Forgetting to file the necessary paperwork.
What is the average monthly payment for Chapter 13? ›
A Chapter 13 petition for bankruptcy will likely necessitate a $500 to $600 monthly payment, especially for debtors paying at least one automobile through the payment plan. However, since the bankruptcy court will consider a large number of factors, this estimate could vary greatly.
What percentage of Chapter 13 bankruptcies are successful? ›
Chapter 13 should never be filed without a lawyer. Chapter 13 cases filed with an attorney already have only a 33% success rate; that number drops to a 2.3 % success rate without a lawyer. In fact, many bankruptcy trustees will tell you they have never seen a successful Chapter 13 case where a debtor was unrepresented.
Can a creditor refuse Chapter 13? ›
Unlike chapter 7, creditors do not have standing to object to the discharge of a chapter 12 or chapter 13 debtor. Creditors can object to confirmation of the repayment plan, but cannot object to the discharge if the debtor has completed making plan payments.
What would disqualify you from filing Chapter 13? ›
Noncompliance with Court Orders: If you have previously failed to comply with court orders or failed to complete a court-approved credit counseling course, it can adversely affect your eligibility for Chapter 13 bankruptcy.
Can you walk away from a Chapter 13? ›
Chapter 13 – See Bankruptcy Code Section 1307 – A debtor has a right to dismiss its Chapter 13 bankruptcy case if the bankruptcy began as a Chapter 13 case, but the court may place restrictions on a debtor's ability to file a subsequent bankruptcy case.
What is the debt limit for Chapter 13? ›
Today, June 21, 2022, President Joe Biden signed the Bankruptcy Threshold Adjustment and Technical Corrections Act which increased the debt limits of Chapter 13 bankruptcy proceedings to a combined total of $2,750,000.
If a bankruptcy case is closed without a discharge because an individual debtor did not timely file a Certificate of Completion of Instructional Course Concerning Personal Financial Management, a debtor must file a Motion to Reopen the Case. Closing does not necessarily mean that all adversary proceedings are finished.
How to get out of Chapter 13 early? ›
Ending Your Chapter 13 Plan Early
There are only two ways to pay off a Chapter 13 bankruptcy early: pay 100% of what you owe, or. qualify for a hardship discharge.
What can I lose in Chapter 13? ›
You Don't Get to Keep Assets If You Fail
The idea of keeping your home and car and personal belongings is an attractive part of Chapter 13. But if the case fails or is dismissed, protection for those assets disappears.
Do you pay back everything on Chapter 13? ›
You don't have to pay unsecured debts in full. Instead, you pay all your disposable income toward the debt during your three-year or five-year repayment plan. The unsecured creditors must receive as much as they would have if you'd filed Chapter 7.
Who gets paid first in Chapter 13? ›
Instead, bankruptcy law sets forth the order that your bankruptcy trustee must pay your debts. Usually, the trustee pays them in this order: secured debts first, followed by priority debts, and then unsecured debts.
Can I keep my tax refund in Chapter 13? ›
You can generally keep all of your refund if you have enough money to cover all of your debt. In other words, if your monthly income is enough to complete your repayment plan within three, four or five years, you could be permitted to keep your entire tax return.
How many Chapter 13 plans fail? ›
Nationally, about 95% of chapter 7 cases complete successfully. Chapter 13. It varies a lot from state to state and from law firm to law firm. Success rates vary from 40% to 70%.
Can a company survive Chapter 13? ›
If your business isn't a sole proprietorship, the short answer is no—Chapter 13 bankruptcy is for individuals and sole proprietors only. However, a business owner can file for Chapter 13 personally. Sometimes, having less personal debt to pay can be enough to help a business survive.
How far back does a trustee look at bank statements? ›
Trustees typically examine your financial transactions over the past two years. This review includes bank statements, credit card transactions, income records, and major financial activities.
