An Overview of Chapter 13 Bankruptcy

Chapter 13 can be a good solution for people who need time to pay off certain debts and who have enough income to meet the Chapter 13 requirements. In Chapter 13, you get to keep all of your property, regardless of its value. However, you will have to pay your unsecured debtors (those to whom you owe credit card debts, medical debts, and most court judgments, for example) the value of the property you would lose if you filed for Chapter 7 bankruptcy.

If you are facing foreclosure on your home, Chapter 13 provides a powerful remedy. You can keep your home by proposing a feasible repayment plan that includes your missed payments, as long as you stay current on your mortgage. And that’s not all: Legislation pending in Congress may even allow the bankruptcy judge to modify your loan to make your current payments more affordable. To find out whether this legislation has become law, check out Nolo’s Bankruptcy Blog: Select "Blogs" from our home page, www.nolo.com.

Here is a brief overview of the Chapter 13 bankruptcy process, from start to finish.

Costs

Everyone who files for Chapter 13 bankruptcy has to pay the filing fee of $274, due either when you file your initial bankruptcy paperwork or in four equal installments (with the court’s permission). You’ll also have to pay a fee—typically about $100 total—to the credit counseling agency where you receive your mandatory prefiling credit counseling and postfiling budget counseling. If you decide to hire a lawyer to help you with your case, you can expect to pay an additional $2,500 or more. You won’t have to come up with the entire lawyer’s fee all at once, but you will probably have to make a sizable initial payment (maybe $750–$1,000) and pay the rest off over the course of your plan.

If you decide to handle your own case (as an increasing number of people do), you most likely will need to pay for some assistance or information. This will typically consist of one or more of the following:

• one or more self-help law books on Chapter 13 bankruptcy, including this one (roughly $30–$50 a pop)
• consultation with a lawyer (roughly $100–$200 an hour), and
• clerical assistance (help completing your forms) from a bankruptcy petition preparer (roughly $125–$250).

Filing Your Papers

To begin a Chapter 13 bankruptcy, you fill out a packet of forms in which you disclose your property, debts, and economic transactions during the several years before you file. If you are familiar with Chapter 7 bankruptcy, the official forms for Chapter 13 are pretty much the same.

In addition, you must prepare or produce:

• A form (Form 22C: Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income) that determines whether your income is more or less than the median income in your state. This calculation determines how long your repayment plan must last. If your income is more than the median, your plan must last five years; if your income is less, you can propose a three-year plan. If your income is more than the median, you must also use this form to calculate how much disposable income you will have available to commit to your plan over the five-year period.
• Your Chapter 13 repayment plan, showing how you propose to pay your mandatory debts (child support, tax arrearages, and so on) and some or all of your other debts over the three- to five-year period. (See Ch. 8 for help creating a repayment plan that the court will approve.)
• A certificate showing you have participated in a credit counseling program during the 180-day period before filing for bankruptcy (this requirement is explained in Ch. 9). If the credit counseling agency comes up with a proposed repayment plan that would allow you to pay your debts outside of bankruptcy, you must submit this as well.
• Pay stubs received from your employer during the 60-day period before you file, along with an accompanying court form.
• Proof that you’ve filed your federal and state income tax returns for the previous four years.
• A copy of your most recent IRS income tax return (or a transcript of that return).

Chs. 7 through 9 take you through the form preparation and filing process, step by step.

The Repayment Plan

When you file for Chapter 13, you must submit a repayment plan. This plan must demonstrate that you can pay your mandatory debts, and perhaps repay all or a portion of your other debts, over the three- or five-year repayment period.

Which Debts Must Be Repaid

Chapter 13 requires you to pay some of your debts in full—and as much of your remaining debts as you can—from the income you have available. Generally, you will have to be able to show, at the beginning of your case, that you are likely to have enough income to remain current on debts that secure collateral you want to keep (for example, a mortgage or car note) while paying off your back taxes, back child support owed to a child or ex-spouse, and any mortgage and secured debt arrearages you owe. And, as explained in Ch. 3, your plan also has to allow for total payments to your unsecured creditors that are at least equal to the value of your nonexempt property—the property you would lose in a Chapter 7 bankruptcy.

Of course, if you are willing to sell your home or give back your car, you can minimize the amount of debt you have to repay—and you don’t have to pay back all of the back child support you owe during your Chapter 13 repayment period if the support is owed to a government agency rather than your ex-spouse or child.

Example: Ken owes $27,000 in back child support. His ex-wife assigned this debt to the local government agency that enforces child support orders when she went on public assistance. Ken doesn’t earn much income, and he would not be able to propose a confirmable Chapter 13 plan if he had to pay back the entire child support debt. Because he now owes the debt to a government agency rather than to his ex, however, he doesn’t have to repay it all over the life of his plan. The remainder of the debt won’t be discharged when his Chapter 13 case is over; he will continue to owe whatever he can’t pay back after his bankruptcy case ends.

Length of the Repayment Period

You must propose a repayment plan that lasts for either three or five years, depending on your income. As you’ll learn in Ch. 4, the bankruptcy law now imposes a number of requirements on filers whose average monthly income in the six months before they file for bankruptcy is more than the median income in their state. Among other things, these filers must propose a five-year repayment plan.

Filers whose average monthly income for the six-month period is less than the median have the choice of filing for either Chapter 7 or Chapter 13 bankruptcy (as long as they meet the other eligibility requirements and they don’t have enough excess actual income to fund a Chapter 13 plan). If they use Chapter 13, these filers may propose a three-year repayment plan, and may use their actual expenses to calculate how much disposable income they will have to devote to that plan.

Filers whose income is more than the median must propose a five-year repayment plan, and must use standard amounts set by the IRS—rather than their actual expenses—to calculate their disposable income. As a result, higher-income filers may have to devote more of their money, for a longer period of time, to repaying their debts.

To learn more about how to calculate your average monthly income, find out whether you are above or below your state’s median, and figure out which expenses to use in calculating your disposable income, see Ch. 4.

Coming Up With a Plan the Judge Will Approve

You can’t proceed with a Chapter 13 bankruptcy unless a bankruptcy judge approves (confirms) your plan. As mentioned, some creditors are entitled to receive 100% of what you owe them, while others may receive a much smaller percentage or even nothing at all if you won’t have any disposable income left over after the mandatory debts are paid. For example, a Chapter 13 plan must propose that any child support you owe to a spouse or child (as opposed to a government agency) will be paid in full over the life of your plan; otherwise, the judge will not confirm it. On the other hand, the judge can confirm a plan that doesn’t repay any portion of your credit card debts if you won’t have any disposable income left after paying your child support obligations, whether you owe them to your former spouse or to the government.

Tip: You may have more—or less—disposable income than you think. Chapter 13 requires you to commit your "projected disposable income" to repaying your debts over the life of your plan. Some courts calculate your projected disposable income by subtracting your allowable expenses from your average income during the six months before you filed for bankruptcy, which may not give an accurate picture of your current income and expenses. Other courts look at your current income and expenses at the time you file, if those figures more accurately reflect your finances going forward. For more information on calculating your disposable income, see Ch. 5.

The Automatic Stay

When you file for Chapter 13 bankruptcy, the bankruptcy court automatically issues an order preventing most creditors (with some exceptions) from taking action to collect a debt against you or your property. So, for example, if a foreclosure sale of your home or a vehicle repossession is in the works, the stay stops the sale or repossession dead in its tracks. (However, the automatic stay doesn’t apply if you’ve had two previous bankruptcy cases dismissed in the past year.) The automatic stay is discussed in more detail in Ch. 2.

The Meeting of Creditors

Once you file your papers, the court will schedule a meeting of creditors within 20 to 40 days after your filing date—and send notice of this meeting to you and the creditors listed in your bankruptcy papers. You (and your spouse if you have filed jointly) are required to attend. You’ll need to bring two forms of identification—a picture ID and proof of your Social Security number.

The creditors’ meeting is conducted by the Chapter 13 bankruptcy trustee for your court. No judge is present, and the meeting is held outside of court, often in the nearest federal building. Although the bankruptcy trustee is not a judge, you still have a duty to cooperate with the trustee.

A typical creditors’ meeting lasts less than 15 minutes. The trustee will briefly go over any questions raised by the information you entered in the forms. The trustee is likely to be most interested in the fairness and legality of your proposed repayment plan, and your ability to make the payments you have proposed. (See Ch. 8 for more on Chapter 13 plans.) The trustee has a vested interest in helping you successfully navigate the Chapter 13 process because the trustee gets paid a percentage of all payments doled out under your plan.

The trustee will also make sure you have filed your tax returns for the previous four years. If not, the trustee will continue the creditors’ meeting to give you a chance to file these returns. Ultimately, you will not be allowed to proceed with a Chapter 13 bankruptcy unless and until you bring your tax filings up to date.

When the trustee is finished asking questions, any creditors who show up will have a chance to question you. Secured creditors will likely attend, especially if they have any objections to the plan you have proposed as part of your Chapter 13 filing. They may claim, for example, that your plan isn’t feasible, that you’re giving yourself too much time to pay your arrears on your car note or mortgage (if any), or that your plan proposes to pay less on a secured debt than the replacement value of the collateral.

An unsecured creditor who is scheduled to receive very little under your plan might show up, too, if that creditor thinks you should cut your living expenses and thereby increase your disposable income (the amount from which unsecured creditors are paid). This is more likely to happen if you are using your actual expenses to compute your disposable income (as filers whose income is less than the state median are allowed to do) instead of standard expense figures set by the IRS.

Come to the meeting prepared to negotiate with disgruntled creditors. If you agree to make changes to accommodate their objections, you must submit a modified plan. While the trustee won’t use the creditors’ meeting to rule on any objections raised by the creditors, the trustee may raise these objections on behalf of the creditors later, at your confirmation hearing before the judge.

The Confirmation Hearing

Chapter 13 bankruptcy requires at least one appearance before a bankruptcy judge. (In some districts, the judge comes into the courtroom only if the trustee or a creditor objects to your plan, and you want the judge to rule on the objection.) At this "confirmation hearing," which will be held shortly after the creditors’ meeting, the judge either confirms (approves of) your proposed plan or sends you back to the drawing board for various reasons—usually because your plan doesn’t meet Chapter 13 requirements. (For example, a judge might reject your plan because you don’t have enough income to pay off your priority creditors and stay current on your secured debts, such as a car note or mortgage.)

You are entitled to amend your proposed plan until you get it right or the judge decides that it’s hopeless. Each amendment requires a new confirmation hearing and appropriate written notice to your creditors. (For more information on the confirmation hearing and how to amend your plan and serve your creditors, see Ch. 10.) Once your plan is confirmed, it will govern your payments for the three- to five-year repayment period.

Possible Additional Court Appearances

If your plan is drafted correctly from the beginning, your confirmation hearing will probably be the only time you have to appear before the bankruptcy judge. However, you may need to make one or more additional appearances in court to:

• confirm your repayment plan if you later amend it
• value an asset, if your plan proposes to pay less for a car or other property than the creditor thinks it’s worth (this might happen if you try to "cram down" the debt to the item’s current value)
• respond to requests by a creditor or the trustee to dismiss your case or amend your plan
• respond to a creditor who opposes your right to discharge a particular debt (perhaps claiming that you incurred the debt through fraud)
• discharge a type of debt that can be discharged only if the judge decides that it should be (for example, to discharge a student loan because of hardship)
• eliminate a lien on your property that will survive your Chapter 13 bankruptcy unless the judge removes it, or
• reaffirm a debt that would otherwise not survive your bankruptcy.

Many of these procedures are covered in Ch. 11.

See an Expert: You’ll need to talk to a lawyer. For the best possible outcome, you will probably find it necessary to hire an attorney if any of these court appearances are required. While some judges and trustees may be helpful, we’re sorry to say that many will make every attempt to make your life difficult—and bully you into hiring a lawyer—if you try to go it alone. See Ch. 15 for information on finding and working with a bankruptcy lawyer.

Making Your Payments Under the Plan

You are required to make your first payment under your proposed repayment plan within 30 days after you file for bankruptcy. If the bankruptcy court ultimately confirms your plan, your payment will be distributed to your creditors in accordance with the plan’s terms. If your Chapter 13 bankruptcy never gets off the ground, the trustee will return the money to you, less administrative expenses.

Once your plan is confirmed, you will make payments, usually monthly, to the bankruptcy trustee, an official appointed by the bankruptcy court to oversee your case. The trustee will usually require you to agree to an order that takes the payments directly out of your bank account or paycheck. The trustee uses your monthly payments to pay the creditors in accordance with the payment order contained in your plan. The trustee also collects a statutory fee (roughly 8% to 10% of the amount you will pay under your plan).

If you can show that you have a history of regular income spread out in uneven payments over the year— for example, quarterly royalty payments or predictable seasonal income fluctuations (for instance, if you do construction work in a location that has severe winters)—your plan may provide for payments when you typically earn income, rather than every month.

If Something Goes Wrong

Three to five years is a long time. What happens if you can’t make a payment or it becomes apparent— perhaps because of a change in your income or life circumstances—that you won’t be able to complete your plan? If you miss only a payment or two, you can usually arrange with the trustee to make up the difference. If you lose your income stream, however, and you definitely won’t be able to complete the plan, you can convert your bankruptcy to Chapter 7 (if that makes sense) or perhaps obtain a "hardship" Chapter 13 discharge from the court. In many cases, Chapter 13 bankruptcies that don’t work out are dismissed entirely.

If your case is dismissed, you’ll owe your creditors the balances on your debts from before you filed your Chapter 13 case, less the payments you made, plus the interest that accrued while your Chapter 13 case was open. See Ch. 13 for more on what happens if you are unable to complete your plan.

Personal Financial Management Counseling

Before you make your last plan payment, you’ll have to complete a personal financial management counseling course (called budget counseling)—and file an official form certifying that you did so—in order to get your discharge. This counseling covers basic budgeting, managing your money, and using credit responsibly. See Ch. 10 for more on this requirement.

After You Complete Your Plan

Once you complete your plan, certify that you’ve remained current on your child support or alimony obligations, and file proof that you’ve completed your personal financial management counseling, your remaining debts will be discharged, if they are the type of debts that can be discharged in Chapter 13. (See "Which Debts Are Discharged in Chapter 13 Bankruptcy," below, for more information.) For instance, if you have $40,000 in credit card debt, and you pay off $10,000 through your repayment plan, the remaining $30,000 will be discharged once you complete the plan. However, you will still owe whatever is left of the debts that you can’t, by law, discharge in Chapter 13. Debts that you can’t discharge include domestic support obligations and student loans (unless you can show that repaying the loan would cause undue hardship); most types of debts—including credit card debts—are discharged.

Example: Karen owes $60,000 in credit card debts, $60,000 in student loans, and $2,000 in alimony. Karen pays off the alimony in full (as required by law) and 10% of her credit card debts and student loans. The remainder of the credit card debts will be discharged, but she will still owe the rest of her student loan debt ($54,000) unless she can convince the judge to order it discharged because of undue hardship.

Which Debts Are Discharged in Chapter 13 Bankruptcy

Not all debts are discharged in Chapter 13 bankruptcy. Of course, if you will repay all of your unsecured debts in full over the life of your plan, no discharge is necessary. But if your plan provides for less than full repayment of your unsecured debts, whatever you still owe may or may not be discharged.

Debts That Are Discharged

As a general rule, whatever you still owe on most credit card debts, medical bills, and lawyer bills is discharged, as are most court judgments and loans. Also, under the new bankruptcy law, debts you owe to an ex-spouse arising from a divorce or separation agreement that are not for support are discharged in Chapter 13 (but not in Chapter 7), as are debts incurred for the purpose of paying taxes.

Debts That Are Not Discharged

Debts that survive a Chapter 13 bankruptcy (unless you pay them in full during the life of your plan) include:

• debts that you don’t list in your bankruptcy forms
• court-imposed fines and restitution
• back child support and alimony
• student loans (with rare exceptions)
• recent back taxes
• taxes for years in which you did not file a return, and
• debts you owe because of a civil judgment arising out of your willful or malicious acts, or for personal injuries or death caused by your drunk driving.

Debts That Are Not Discharged If the Creditor Successfully Objects

Some types of debts will survive your bankruptcy only if the creditor files a motion in court to prove that the debt shouldn’t be discharged. For example, if a creditor successfully objects to a debt arising from your fraudulent actions or recent credit card charges for luxuries, those debts will be waiting for you after your bankruptcy, unless you managed to pay them all off during your repayment plan.

Is Chapter 13 Right for You?

Some of you won’t have a choice between Chapter 7 and Chapter 13 bankruptcy—if you want to file for bankruptcy, you will have to use Chapter 13 and repay some of your debt. (See Ch. 4 to find out whether you’ll be limited to Chapter 13.) Likewise, if you don’t have a steady income, your only bankruptcy choice is Chapter 7. Many people who have a choice decide to file under Chapter 7, but there are some situations when Chapter 13 will be the better option.

Upper Income Filers Must Use Chapter 13

If your average monthly income during the six months before you file for bankruptcy is higher than the median income for your state, you may not be able to use Chapter 7. If your average income is more than the median, you cannot file for Chapter 7 bankruptcy if your disposable income would allow you to pay your unsecured creditors at least $10,950 over a five-year period (about $182 a month). (See Ch. 4 for more on this "means" test.)

Reasons to Choose Chapter 7

Most people who have a choice traditionally have opted to file for Chapter 7 bankruptcy because it is relatively fast, effective, easy to file, and doesn’t require payments over time. It also doesn’t require you to be current in your income tax filings. In the typical situation, a case is opened and closed within three to four months, and the filer emerges debt free except for a mortgage, car payments, and certain types of debts that survive bankruptcy (such as student loans, recent taxes, and back child support).

If you have any secured debts, such as a mortgage or car note, Chapter 7 allows you to keep the collateral as long as you are current on your payments. However, if your equity in the collateral substantially exceeds the exemption available to you for that type of property, the trustee can sell the property, pay off the loan, pay you your exemption (if any), and pay the rest to your unsecured creditor. If you are behind on your payments, the creditor can come into the bankruptcy court and ask the judge for permission to repossess the car (or other personal property) or foreclose on your mortgage. As a general rule, however, most Chapter 7 filers are able to keep all their property, either because they don’t own much to begin with or because any equity they own is protected by an exemption.

Recent changes in the bankruptcy law have put a few obstacles in the way of Chapter 7 filers. Nevertheless, assuming you qualify, you likely will find it easier —and more effective—to file for Chapter 7 than to keep up with a long-term payment plan under Chapter 13. And if you do file for Chapter 13 and don’t keep up with your repayment plan, you will likely get no benefit from having engaged in the Chapter 13 process if you later convert to a Chapter 7 (unless the court lets you off the hook early for hardship reasons).

Example: Frank files for Chapter 13 bankruptcy. His five-year plan includes current payments on his mortgage, repayment of part of his $50,000 credit card debt, and payment in full of a $2,000 back child support debt. Frank remains current on his plan for three years, and then loses his job. In that three-year period, Frank, through the Chapter 13 trustee, paid off $12,000 worth of the credit card debt as well as the child support debt.

If Frank converts his case to Chapter 7, he can discharge all of the remaining credit card debt. But had Frank filed Chapter 7 from the beginning, he could also have discharged the $12,000 that he already paid to the credit card companies under his Chapter 13 plan. If Frank decides to skip Chapter 7 and negotiate a repayment schedule for the remaining $38,000, Frank will at least have made a $12,000 dent in the original $50,000 debt by filing for Chapter 13.

The moral of the story is that you should file for Chapter 7 in the first place if:

• you are eligible to use Chapter 7
• you have significant doubts about your ability to complete a Chapter 13 repayment plan, and
• none of the pressing reasons to use Chapter 13 is present in your case (see below).

Reasons to Choose Chapter 13

Although Chapter 7 is easier and doesn’t require repayment, there are many good reasons why people who qualify for both types of bankruptcy choose Chapter 13 instead. Generally, Chapter 13 bankruptcy might make sense if you will have adequate, steady income to fund your plan for the appropriate period of time, and are in any of the following situations:

• You are facing foreclosure on your home or your car is being repossessed, and you want to keep your property. Using Chapter 13, you can make up the missed payments over time and reinstate the original agreement. You generally cannot do this in Chapter 7 bankruptcy—instead, you’ll ultimately lose the property.
• You have more than one mortgage and are facing foreclosure because you can’t make all the payments. If your home’s value is less than or equal to what you owe on your first mortgage, you can use Chapter 13 to change the additional mortgages into unsecured debts—which don’t have to be repaid in full—and lower the amount of your monthly payments.
• Your car is reliable and you want to keep it, but it’s worth far less than you owe. You can take advantage of Chapter 13 bankruptcy’s cram-down option (for cars purchased more than 2½ years before filing for bankruptcy) to keep the car by repaying its replacement value in equal payments over the life of your plan, rather than the full amount you owe on the contract (see Ch. 8).
• You have a codebtor who will be protected under your Chapter 13 plan but would not be protected if you used Chapter 7 (see Ch. 2).
• You have a tax obligation, student loan, or other debt that cannot be discharged in bankruptcy, but can be paid off over time in a Chapter 13 plan.
• You owe debts that can be discharged in a Chapter 13 bankruptcy but not in a Chapter 7 bankruptcy. For instance, debts incurred to pay taxes can’t be discharged in Chapter 7 but can be discharged in Chapter 13.
• You want to use the Chapter 13 forum to sue one or more harassing creditors for violating state and federal antiharassment laws. For more information on these laws, see Solve Your Money Troubles, by Robin Leonard and John Lamb (Nolo).
• You have a sincere desire to repay your debts, but you need the protection of the bankruptcy court to do so.

Alternatives to Bankruptcy

By now, you should have a pretty good idea of what filing a Chapter 13 bankruptcy will involve—and what you can hope to get out of it. Before you decide whether a Chapter 13—or Chapter 7—bankruptcy is the right solution for your debt problems, however, you should consider some basic options outside of the bankruptcy system. Although bankruptcy is the only sensible remedy for some people with debt problems, an alternative course of action makes better sense for others. This section explores some of your other options.

Do Nothing

Surprisingly, the best approach for some people who are deeply in debt is to take no action at all. You can’t be thrown in jail for not paying your debts (with the exception of child support), and your creditors can’t collect money from you that you just don’t have.

Creditors Must Sue to Collect

Except for taxing agencies and student loan creditors, creditors must sue you in court and get a money judgment before they can go after your income and property. The big exception to this general rule is that a creditor can take collateral—repossess a car or furniture, for example—when you default on a debt that’s secured by that collateral.

Under the typical security agreement (a contract involving collateral), the creditor can repossess the property without first going to court. But the creditor will not be able to go after your other property and income for any "deficiency" (the difference between what you owe and what the repossessed property fetches at auction) without first going to court for a money judgment.

To secure a money judgment, a creditor must have you personally served with a summons and complaint. In most states, you will have 30 days to file a response in the court where you are being sued. If you don’t respond, the creditor can obtain a default judgment and seek to collect it from your income and property. If you do respond—and you are entitled to do so even if you think you owe the debt—the process will typically be set back several months until the court can schedule a trial where you can be heard. In most courts, you respond by filing a single document in which you deny everything in the creditor’s complaint (or, in some courts, admit or deny each of the allegations in the complaint).

Much of Your Property Is Protected

Even if creditors get a money judgment against you, they can’t take away such essentials as:

• basic clothing
• ordinary household furnishings
• personal effects
• food
• Social Security or SSI payments necessary for your support
• unemployment benefits
• public assistance
• bank accounts with direct deposits from government benefit programs, and
• 75% of your wages (but more can be taken to pay child support judgments).

The state exemptions described in Ch. 4 (and listed in Appendix A) apply whether or not you file for bankruptcy. Even creditors who get a money judgment against you can’t take these protected items. (However, neither the federal bankruptcy exemptions nor the California system 2 exemptions apply if a creditor sues you: Those are bankruptcy-only exemptions.)

When You Are Judgment Proof

Judgments are good only if the person who has it—the judgment creditor—can seize income or property from the debtor. If there is nothing to collect, the debtor is said to be "judgment proof." For example, if your only income is from Social Security (which can be seized only by the IRS) and all your property is exempt under your state’s exemption laws, your judgment creditor can’t take your income. Your life will continue as before, although one or more of your creditors may get pushy from time to time. While money judgments last a long time and can be renewed, this won’t make any difference unless your fortunes change for the better. If that happens, you might reconsider bankruptcy at that time.

If your creditors know that their chances of collecting a judgment from you any time soon are slim, they probably won’t sue you in the first place. Instead, they’ll simply write off your debt and treat it as a deductible business loss for income tax purposes. After some years have passed (usually between four and ten), the debt will become legally uncollectible, under state laws known as statutes of limitation.

These statutes of limitation won’t help you if the creditor sues or renews its judgment within the time limit, but most won’t. Lawsuits typically cost thousands of dollars in legal fees. If a creditor decides, on the basis of your economic profile, not to go to court at the present time, it is unlikely to seek a judgment down the line to extend its claims. In short, because creditors are reluctant to throw good money after bad, your poor economic circumstances might shield you from trouble.

Caution: Don’t restart the clock. The statute of limitations can be renewed if you revive an old debt by, for example, admitting that you owe it or making a payment. As soon as you acknowledge a debt, the clock starts all over again. Savvy creditors are aware of this loophole and may try to trick you into admitting the debt so they can sue to collect it. Sometimes, it might be a good idea to try to repay a debt, particularly one to a local merchant with whom you wish to continue doing business. But unless you are planning to make good on the debt or try to negotiate a new payment schedule, you should avoid any admissions.

Stopping Bill Collector Harassment

Many people are moved to file for bankruptcy to stop their creditors from making harassing telephone calls and writing threatening letters. As explained above and in Ch. 2, the automatic stay stops most collection efforts as soon as you file for bankruptcy. However, you don’t have to start a bankruptcy case to get annoying creditors off your back. Federal law forbids collection agencies from threatening you, lying about what they can do to you, or invading your privacy. And many state laws prevent original creditors from taking similar actions.

Under federal law, you can legally force collection agencies to stop phoning or writing you by simply demanding that they stop, even if you owe them a bundle and can’t pay a cent. (This law is the federal Fair Debt Collections Practices Act, 15 U.S.C. §§ 1692 and following.) For more information, see Solve Your Money Troubles, by Robin Leonard and John Lamb (Nolo). Here’s a sample letter asking a creditor to stop contacting the debtor.

[Sample Letter telling Collection Agency to Stop Contacting You] omitted for online sample chapter

See An Expert: Your debt collector may be putting money in your pocket. The Fair Debt Collection Practices Act places a number of restrictions on debt collector activity. The remedies provided by the act include damages and attorneys fees. More and more attorneys are interested in using these remedies, because they can earn some money without taking it out of their client’s recovery. If you are suffering debt collection abuses, consider consulting with a bankruptcy attorney to find out if this type of lawsuit might be worth your while. For more information on the Act and its remedies, see Solve Your Money Troubles, by Robin Leonard and John Lamb (Nolo).

Negotiate With Your Creditors

If you have some income, or you have assets you’re willing to sell, you may be a lot better off negotiating with your creditors than filing for bankruptcy. Negotiation may buy you some time to get back on your feet, or you and your creditors may agree to settle your debts for less than what you owe.

Creditors hate it when debtors don’t pay their debts. They don’t like the hassle of instituting collection proceedings, or the fact that these proceedings tend to turn debt-owing customers into former customers. To avoid the collection process and keep customers, creditors sometimes will reduce the debtor’s expected payments, extend the time to pay, drop their demands for late fees, and make similar adjustments. They’re most likely to be lenient if they believe you are making an honest effort to deal with your debt problems.

Tip: More lenders are offering foreclosure "workouts." As the number of foreclosures has skyrocketed, lenders are increasingly willing to help homeowners keep their homes. These processes, called foreclosure work outs, might include:

• renegotiating the terms of the mortgage so that the arrearage is paid at the end of the mortgage term, either over additional time or as a balloon payment
• renegotiating the interest rate to lower the payments or keep them at the same level (if the interest rate is adjustable and will soon go up), or
• using a deed in lieu of foreclosure, where the debtor gives back the house in return for the lender’s agreement not to foreclose and not to go after any additional money the debtor owes on the mortgage.

As soon as you realize that you’re going to have trouble paying a bill, write to the creditor. Explain the problem—whether it’s an accident, job layoff, divorce, emergency expense for your child, unexpected tax bill, or something else. Mention any developments that point to an improving financial condition, such as job prospects. Also, consider sending a token payment every month (the more the better, of course). This tells the creditor that you are serious about making good on the debt but just can’t afford to pay it off right now.

Token payments make a big difference, especially to local creditors. And if you want to keep that credit or business relationship, paying even a small amount might help. On the other hand, if it’s been a long time since you’ve made any payments, you might want to hold off on your token payment until you’ve checked on the "statute of limitations" for that debt (the state time limit after which the debt goes away if no court action has been filed to collect it). Your payment might have the unfortunate effect of starting up a new limitations period.

Your success in getting creditors to give you time to pay will depend on the types of debts you have, how far behind you are, and the creditors’ policies toward debts that are in arrears.

If you are not yet behind on your bills, be aware that a number of creditors have a ridiculous policy that requires you to default—and in some cases, become at least 90 days past due—before they will negotiate better repayment terms. If any creditor makes this a condition of negotiating, find out from the creditor how you can keep the default out of your credit report.

In addition, increasing numbers of creditors simply refuse to negotiate with debtors. Despite the fact that creditors get at least something when they negotiate settlements, many ignore debtors’ pleas for help, continue to make telephone calls demanding payment (unless you assert your right under federal law to not receive the calls—see "Stopping Bill Collector Harassment," above), and leave debtors with few options other than to file for bankruptcy. Historically, nearly one-third of the people who filed for bankruptcy stated that the final straw was the unreasonableness of their creditors or the collection agencies hired by their creditors.

You might be wondering whether you should tell your creditors that you are thinking about filing for bankruptcy. After all, shouldn’t they be willing to negotiate for a lesser amount—that you can pay—if you can get rid of the debt entirely? Unfortunately, experience shows that this tactic often backfires. Some creditors will call you every day demanding to know who your attorney is. When you tell them you don’t have an attorney, they may well take the opportunity to berate you for not paying your debts and warn you to call them when you do get an attorney. In short, mentioning the "B" word is more likely to cause you grief than it is to produce a good result.

Get Outside Help to Design a Repayment Plan

Prior to the new bankruptcy law, the combination of high consumer debt and easy access to information (especially on the Internet) led to an explosion in the number of credit and debt counseling agencies. Some provided limited services, such as budgeting and debt repayment, while others offered a range of services, from debt counseling to financial planning. Now, however, the advent of new requirements for credit counseling agencies under the new bankruptcy law, coupled with an aggressive auditing policy adopted by the IRS toward "nonprofit" counseling agencies, has significantly changed the credit-counseling landscape.

Credit and Debt Counseling

Before you choose a credit counselor or debt management plan off the Web, be aware that while some of these agencies are legitimate, others are not. How can you tell the difference? The key will be whether the agency has been approved by the Office of the U.S. Trustee to provide credit counseling to bankruptcy filers.

Prior to the new law, Money Management International and its family of Consumer Credit Counseling Services agencies had a good track record of providing consumers nationwide with financial education and credit counseling. Counseling is available by telephone (888-845-5669), on the Internet (www. moneymanagement.org), and in person at one of its more than 130 local branch offices. In addition to the U.S. Trustee requirements, guidelines for these credit counseling services are provided by the National Foundation for Credit Counseling (NFCC)™ (at www. nfcc.org), the trade organization that created the Consumer Credit Counseling Services (CCCS) network.

How Debt Management Works

To use a credit counseling agency to help you pay your debts, you must have some steady income. A counselor will contact your creditors to let them know that you’ve sought assistance and need more time to pay. Based on your income and debts, the counselor, with your creditors, will decide how much you must pay and for how long. You must then make one payment each month to the counseling agency, which in turn will pay your creditors. The agency will ask the creditors to return a small percentage of the money received to the agency office, in order to fund its work. This arrangement is generally referred to as a "debt management program."

Some creditors will make overtures to help you when you’re participating in a debt management program such as reducing interest, waiving minimum payments, and forgiving late charges. But many creditors will not make interest concessions, such as waiving a portion of the accumulated interest to help you repay the principal portion of the debt. More likely, you’ll get the late fees dropped and the opportunity to reinstate your credit if you successfully complete the program.

Pros and Cons of Debt Management

Participating in a credit counseling agency’s debt management program is a little bit like filing for Chapter 13 bankruptcy. But working with a credit or debt counseling agency has one big advantage: No bankruptcy will appear on your credit record.

On the other hand, a debt management program has two disadvantages when compared to Chapter 13 bankruptcy. First, if you miss a plan payment, Chapter 13 will often provide a way for you to make it up and continue to protect you from creditors who would otherwise start collection actions. A debt management program has no such protection, so any one creditor can pull the plug on your plan. Also, a debt management program plan usually requires you to pay your unsecured debts in full, over time. In Chapter 13, you often are required to pay only a small fraction of your nonpriority unsecured debts (such as credit card and medical debts).

Critics of credit counseling agencies point out that the counselors tilt toward signing people up for a repayment plan when they would be better off filing for bankruptcy. This way, the agency gets a commission from the creditors that isn’t available in cases that end up in bankruptcy. Under the new bankruptcy law, credit counseling agencies approved by the Office of the U.S. Trustee must follow a number of requirements intended to inform you of your rights and protect against undue influence by creditors. These new rules should prevent you from being ripped off. (See the U.S. Trustee’s website at www.usdoj.gov/ust for more on these requirements.)

Introduction

Chances are good that you’ve picked up this book because your debts have become overwhelming. Maybe you are facing foreclosure on your home, repossession of your car, or constant letters and phone calls from debt collectors. Or perhaps, you’ve realized that your debts have grown far beyond your ability to repay them, and you’re wondering if there’s anything you can do to get back in control of your finances.

Chapter 13 bankruptcy could be the best way to resolve your debt problems. When you file for Chapter 13, you agree to repay all or a portion of your debts over time, under the supervision of the bankruptcy court. Chapter 13 allows you to keep your property while using your income to repay some or all of your debts. In contrast, Chapter 7 bankruptcy allows you to immediately wipe out many debts, but in exchange, you must give up any property you own that isn’t protected by state or federal exemption laws. (You’ll find more information on Chapter 7, including how to decide whether Chapter 7 or Chapter 13 bankruptcy is the better remedy for your debt problems, in "Is Chapter 13 Right for You?" below.)

This book explains every step in the Chapter 13 process, including who can use Chapter 13, how to file the necessary papers, and how to come up with a workable repayment plan. To help you get started, this chapter provides an overview of Chapter 13 bankruptcy—how it works and what it will do for you. It also explains other types of bankruptcy relief and options for dealing with your debts outside of bankruptcy.