How Does Chapter 13 Bankruptcy Work to Reorganize Personal Finances?
Chapter 13 bankruptcy provides a structured way to reorganize personal finances, allowing debtors to regain control over their financial situation while making manageable payments. Here, I’ll walk you through how Chapter 13 bankruptcy works in Oregon and how it helps individuals reorganize their debts effectively.
As a bankruptcy attorney practicing in Oregon, I, Lyndon Ruhnke, frequently guide clients through the difficulties of Chapter 13 bankruptcy. Many people who come to me are struggling with overwhelming debt but want to avoid liquidation and keep their assets, such as their home or car. Here, I’ll discuss how Chapter 13 bankruptcy works with personal finances in Portland, Oregon.
What Is Chapter 13 Bankruptcy?
Firstly, Chapter 13 bankruptcy, often referred to as a "wage earner’s plan," allows individuals with a regular income to create a repayment plan to pay off all or part of their debts over a three- to five-year period. Unlike Chapter 7, which involves liquidating assets to pay off creditors, Chapter 13 enables debtors to keep their property while catching up on overdue payments, according to United States Courts.
In Oregon, as in the rest of the United States, the process is governed by federal bankruptcy laws, but state exemptions and local court procedures also play a significant role. The goal of Chapter 13 is to provide individuals with a realistic path to financial recovery by restructuring their debts into affordable payments.
Who Qualifies for Chapter 13 Bankruptcy in Oregon?
Not everyone is eligible for Chapter 13 bankruptcy. To qualify, a debtor must meet certain requirements. These requirements include:
Regular income: The individual must have a steady source of income, which can come from wages, self-employment, Social Security, pension, rental income, or other sources.
Debt limits: As of 2024, unsecured debts (such as credit card debt and medical bills) must be less than $465,275, and secured debts (such as mortgages and car loans) must be under $1,395,875.
Up-to-date tax filings: The debtor must have filed federal and state tax returns for the past four years.
No recent bankruptcy dismissals: If a previous bankruptcy case was dismissed within the last 180 days due to failure to comply with court orders or voluntary dismissal after creditors sought relief, the debtor may not be eligible.
Filing for Chapter 13 Bankruptcy in Oregon
Moreover, filing for Chapter 13 bankruptcy is a multi-step process that requires careful preparation and attention to detail. As a bankruptcy attorney, I guide my clients through each phase to achieve the best possible outcome.
1. Credit Counseling Requirement
Before filing, debtors must complete an approved credit counseling course. This session, which can be done online or over the phone, helps evaluate financial circumstances and explore alternatives to bankruptcy. A certificate of completion must be filed with the bankruptcy petition.
2. Preparing the Bankruptcy Petition
The bankruptcy petition is a comprehensive document that includes:
A list of all assets and liabilities
A statement of income and expenses
A summary of debts (secured and unsecured)
A proposed repayment plan
Recent tax returns
Proof of income for the past six months
Once completed, the petition is filed with the U.S. Bankruptcy Court for the District of Oregon. The filing fee for a Chapter 13 case is $313, though it can be paid in installments if necessary.
3. The Automatic Stay
Upon filing, an automatic stay goes into effect, which halts all collection actions, including foreclosure, wage garnishment, and creditor harassment. This provides immediate relief to the debtor and allows time to formulate a manageable repayment plan.
Creating and Implementing the Repayment Plan
Additionally, the repayment plan is the cornerstone of a Chapter 13 bankruptcy. It details how the debtor will pay creditors over the next three to five years. The amount paid each month is based on income, necessary living expenses, and debt obligations.
Priority Debts
Certain debts must be paid in full through the plan, including:
Taxes owed to the IRS or the state
Domestic support obligations (child support and alimony)
Administrative fees, such as attorney’s fees
Secured Debts
Secured debts, like a mortgage or car loan, must be addressed in the plan. If the debtor is behind on mortgage payments, Chapter 13 allows for arrears to be paid off over time, preventing foreclosure.
Unsecured Debts
Credit card balances, medical bills, and personal loans are categorized as unsecured debts. Depending on income and expenses, these debts may be paid in full, partially, or even discharged at the end of the repayment period.
The Confirmation Hearing
Furthermore, about 30 to 45 days after filing, a confirmation hearing is held where the bankruptcy judge reviews the repayment plan. Creditors can object if they believe the plan is unfair or unfeasible. If approved, the debtor must adhere to the plan’s terms for the duration of the repayment period.
Life During a Chapter 13 Bankruptcy
Once the plan is in place, the debtor must make timely payments to the bankruptcy trustee, who distributes the funds to creditors. Any missed payments can jeopardize the case and lead to dismissal.
During this time, major financial decisions—such as purchasing a new vehicle, incurring additional debt, or selling assets—must be approved by the court. Additionally, debtors must continue filing taxes and providing annual income updates.
The Completion of Chapter 13 and Debt Discharge
After successfully making all required payments, the debtor receives a discharge, eliminating remaining eligible debts. Some debts, such as student loans and certain tax obligations, may not be discharged.
Before receiving the final discharge, the debtor must complete a debtor education course, which provides financial management tools to prevent future financial difficulties.
Benefits and Drawbacks of Chapter 13 Bankruptcy
The benefits and drawbacks of Chapter 13 bankruptcy are as follows:
Advantages:
Stops foreclosure: Stops foreclosure allows debtors to catch up on past-due mortgage payments and keep their home.
Protects assets: Unlike Chapter 7, Chapter 13 does not require liquidating assets to pay off creditors.
Debt reduction: In some cases, unsecured debt balances can be significantly reduced.
Stops interest and penalties: Certain debts stop accruing interest, making them easier to pay off.
More favorable to credit score: While bankruptcy affects credit, Chapter 13 is often seen as less damaging than Chapter 7.
Disadvantages:
Long commitment: The repayment plan lasts three to five years, requiring financial discipline.
Court oversight: Financial decisions require court approval, limiting financial flexibility.
Impact on credit: Bankruptcy remains on a credit report for up to seven years, affecting the ability to obtain loans.
Strict budgeting: Disposable income is directed toward repayment, leaving little financial flexibility.
It’s important to consider these advantages and disadvantages of filing Chapter 13 bankruptcy. As an experienced bankruptcy attorney, I work with my clients to help them understand the best way to go about their debt.
Reach Out to My Firm Today
As an experienced bankruptcy attorney in Oregon, I always advise clients to consider all their options, including debt negotiation and credit counseling, before filing. If you’re facing financial difficulties and considering Chapter 13 bankruptcy, seeking legal guidance can make all the difference in achieving a fresh financial start.
I serve Portland, Beaverton, Gresham, and the Portland Metropolitan Area. Contact my firm, Lyndon Ruhnke P.C., to get started.