Introduction to Chapter 13

Understand Chapter 13 with a detailed overview.

Financial planning discussion with advisor

Secure Your Finances With Chapter 13

While bankruptcy is often viewed as a last resort for individuals and families, it shouldn't be. Procrastination is not a financial strategy! If you have found yourself in some financial hot water, bankruptcy can be a positive step. Speaking with a bankruptcy lawyer early on can provide you with more options that you might lose through inaction.

Reasons for Filing Chapter 13 Bankruptcy

There are several common reasons that individuals or families run into financial trouble that may necessitate filing for Chapter 13 bankruptcy.

  • A period of unemployment
  • High medical bills
  • Marital or other family issues
  • Excessive credit card spending (Credit card debt is often a large piece of the problem because, unless each card is paid off in full every month, the exorbitant interest rates cause debt to accumulate rapidly.)
  • Facing Foreclosure
  • Facing Vehicle Repossession
  • Removing, or “stripping”, wholly unsecured subordinate mortgages on your home.
  • Reducing, or “cramming-down”, secured debts (such as car loans, tax liens, judgement liens, etc.) to the value of the property so that the monthly payments on these debts are more affordable.

Chapter 13 bankruptcy is a reorganization of all of your debts over a 3 - 5 year repayment plan. It is generally more encompassing than a Chapter 7 bankruptcy - you can reorganize secured debts, pay off non-dischargeable debt (such as tax debt or back owed child support or alimony), and can pay pennies on the dollar towards your unsecured debt (based on your disposable income or equity in property) - and you still receive a discharge of all dischargeable debts upon completion of your plan.

Eligibility for Chapter 13 Bankruptcy in Virginia

In Virginia, you must satisfy several requirements in order to file for Chapter 13 bankruptcy.

  • Participate in a credit counseling session with an approved debt counselor
  • Prove a steady source of income, even if your income has been reduced, and submit your W-2 or 1040 tax form
  • Demonstrate that your secured and unsecured debt falls within the legal limits
  • Determine how much of your disposable income must be used to pay towards your unsecured debts
  • Provide a financial statement including all current disposable income

Chapter 13 Bankruptcy is available only to individuals and cannot be used by businesses, stockbrokers, or commodity brokers.

When you are considering filing for Chapter 13 bankruptcy, it is important to work with a qualified local bankruptcy attorney. Although some of the rules governing bankruptcy are federal, others are specific to the state of Virginia. The attorney will also help you create a repayment plan that will satisfy the bankruptcy court, which must approve the plan before it can be implemented.

Understand How Your Repayment Plan Should Be Structured

With the assistance of a capable bankruptcy attorney, your repayment plan will be drafted and submitted to the court. You and your attorney will need to demonstrate how much money you will have left each month after paying necessary (reasonable) monthly expenses. Your plan must then specify how you will distribute that remaining money among your creditors.

  • Tax payments and child support payments will always be the top priority.
  • Unsecured debts, such as credit card debt and medical bills, will also be paid, but usually only in part.
  • According to the court-accepted plan, you may be able to pay off these debts for a small percentage of their actual value.

Your payment plan must also:

  • Be filed in good faith
  • Pay creditors at least as much as they would have received in a Chapter 7 bankruptcy (usually, this amount will equal the value of all of your non-exempt property)
  • Use all of your disposable income for at least 3 years

Once your payment plan is submitted, the Debtor must start making payments 30 days after their case is filed. In most cases, these payments can be withdrawn from your wages, directly from a bank account, or mailed directly to the assigned Trustee.

Virginia Bankruptcy Exemptions

In Virginia, as in other states, there are exemptions that can be utilized when you file for Chapter 13 bankruptcy. These exemptions protect your home, your car, your retirement account, and certain other kinds of property from your creditors.

  • While some states let you choose between state and federal bankruptcy exemptions, in Virginia, you must use state exemptions.
  • You are, however, entitled to use non-bankruptcy federal exemptions to protect your disability benefits and any federal or military retirement accounts you may have.

Common exemptions in Virginia are:

  • Real and Personal Property Exemptions 
  • Homestead Exemption: Protects equity in a primary residence (real or personal property). The base exemption is $5,000, plus an additional $500 for each dependent.
    • An additional $50,000 exemption for real or personal property used as a principal residence is also available.
    • Filers aged 65 or older may be able to claim a base exemption of up to $10,000.
    • Disabled veterans may be entitled to an additional exemption of up to $10,000.
  • "Wildcard" Exemption: Virginia allows a householder to use any unused portion of the original $5,000 homestead exemption toward other personal property.
  • Specific Personal Property Exemptions
  • Motor Vehicle: Up to $10,000 of equity in a motor vehicle.
  • Household Goods/Furnishings: Up to $5,000 in value.
  • Wearing Apparel (Clothing): Up to $1,000 in value.
  • Tools of the Trade: Tools, books, instruments, and equipment (including motor vehicles used in the trade) necessary for an occupation, up to $10,000 in value.
  • Firearms: Up to $3,000 in value.
  • Family Heirlooms/Portraits: Up to $5,000 in value.
  • Pets: All animals owned as pets, not kept for sale or profit, are exempt.
  • Health Aids: Medically prescribed health aids.
  • Wedding and Engagement Rings: Exempt without a specific dollar limit.
  • Burial Plots/Contracts: A lot in a burial ground and up to $5,000 in a preneed funeral contract.
  • Wages, Benefits, and Other Assets
  • Wages: 75% of weekly disposable earnings or 40 times the federal minimum wage, whichever is greater, is exempt.
  • Retirement Accounts: Tax-exempt retirement accounts (like 401(k)s, IRAs, and pensions) are generally protected under federal and state law.
  • Public Benefits: Social Security, unemployment compensation, and worker's compensation benefits are exempt.
  • Personal Injury Awards: Compensation recovered in a personal injury claim is exempt from creditor process.
  • Child/Spousal Support: Unpaid or current spousal or child support payments are exempt.

Married couples filing jointly can often double the individual exemption amounts for jointly owned property.

Additionally, if you own your home or other property jointly with your spouse as “Tenants by the Entirety”, that property is fully exempt as to the individual creditors of each spouse.

Other Possible Exemptions

There are a number of other possible exemptions in Chapter 13 bankruptcy cases in Virginia. Your bankruptcy attorney will carefully review these with you and explain which are applicable in your case. In most circumstances, you will be able to protect work tools, child and spousal support payments, recovered funds from personal injury and wrongful death suits, insurance proceeds, unemployment, Social Security, disability, and public assistance payments.

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Double Exemptions for Married Couples in Virginia

One benefit of filing a joint bankruptcy in Virginia is that you and your spouse can double your exemption amounts. This stipulation only applies to property that is jointly owned. It does not cover, for example, a car that is owned by only one of the spouses.

Procedural Matters of a Chapter 13 Bankruptcy

Once you have filed for Chapter 13 bankruptcy, the court will appoint a trustee to oversee and oversee your repayment plan and any property not covered by Virginia exemptions. The trustee will ensure that each of your creditors is paid as much as possible by thoroughly reviewing your assets, income and all involved paperwork. This trustee can challenge any aspect of your payments on an ongoing basis.

Bankruptcy Chapter 13 paperwork on desk
Women reviewing paperwork in an office

Key Procedural Requirements

  • You will be required to attend a Section 341 meeting of your creditors. If any of the creditors object to your repayment plan, it will hopefully be negotiated and resolved after this meeting; if not, a judge will make a final decision.
  • You may have to attend a hearing before a bankruptcy judge to have your repayment plan confirmed.
  • Assuming you make consistent, on-time payments and complete the required debtor education course, the dischargeable debts you owe at the end of your bankruptcy period will be discharged.
  • If your financial circumstances change during the course of your repayment plan, you may be able to modify your plan to reduce your monthly payments, pay off your case earlier than expected, or convert your case to a Chapter 7 bankruptcy.

Plan for Stability

Filing for Chapter 13 bankruptcy is complicated, but it may be your salvation, providing a new, healthy start for your financial life. The assistance of a qualified bankruptcy attorney can be invaluable to help you through this difficult period with as little stress as possible.

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