One of the main reservations bankruptcy law firms see from individuals regarding filing for Chapter 13 bankruptcy is the initial uncertainty surrounding how long the bankruptcy will last. Chapter 13 bankruptcy requires debtors to enter into a repayment plan with the US Bankruptcy Courts, paying monthly installments to the bankruptcy trustee who then divides the money among eligible unsecured creditors. How long your Chapter 13 will last depends primarily on how much debt you owe and how much you have earned over the past 6 months previous to bankruptcy.
Steady Income Required
Chapter 13 bankruptcy is an excellent debt relief tool, as it allows you to payback only some (and sometimes none) of what you owe back to creditors. In order to qualify for Chapter 13 bankruptcy, you need to have a regular form of income that the Bankruptcy Courts can utilize to ensure that creditors are repaid at least a small portion of the total debt. This income doesn't necessarily have to be from W-2 wages, but can come from business earnings, social security, unemployment insurance payouts, or other forms of steady, reliable income or assistance from family.
Qualifying for a 36 Month Plan
When the bankruptcy courts look at your income they take the average of the 6 months immediately prior to you filing your petition for bankruptcy protection. This figure is then compared to the median income in your state with your family size considered. If your income is below the median income for your state, then you will qualify for a 36-month bankruptcy repayment period. This time frame is called a plan duration or a commitment period. You can actually finish your Chapter 13 plan earlier than 36 months if you are able to pay the total of the claims amounts filed in your case in a shorter period of time.
Why You May Want to Extend the Length of Chapter 13
Alternatively, if your income is above the median income for the state in which you file for bankruptcy the repayment period will be 60 months, the most time awarded to any Chapter 13 repayment plan. While you may be thinking "the shorter amount of time, the better", when approaching filing for Chapter 13, there are situations that may warrant opting for a longer commitment period. These situations include if you need to catch up on mortgage or auto loan payments, you need time to pay back large sums of IRS or state tax debt during bankruptcy, or if the bankruptcy court determines that a 36-month period is too short based on the amount of recent income you have earned.
Timing Could Make the Difference
The old adage, "timing is everything" certainly plays a part in filing for Chapter 13 bankruptcy. With the way bankruptcy courts in the United States review income (average of the previous 6 months), then it's obvious that when you file for Chapter 13 bankruptcy is critical. It's smart to seek the advice of a bankruptcy attorney who can walk through your income expectations for the near future, in addition to, your previous income and advise you on the best time to file your bankruptcy case. If you have recently experienced a drop in pay, for example, it may make sense to move forward at once with filing. However, if you have recently received a large sum of money from a bonus or commission, it may make more sense to wait until your income goes down or stabilizes to ensure you receive a shorter commitment period.
To learn more about the Chapter 13 process, contact our Sacramento bankruptcy office today.