13 Mistakes to Avoid When Filing Chapter 13 Bankruptcy

By Brandon Davenport

If you’re faced with insurmountable debt, but want to keep your house and save your assets, Chapter 13 bankruptcy could be the lifeline you’re looking for. Under Chapter 13, also called “reorganization bankruptcy,” you work within a tightly controlled budget plan to pay back your creditors over a three-to-five year period. It’s a valuable option, but a complicated one. If you’re considering filing Chapter 13, be sure to avoid these thirteen common mistakes.

1. Waiting too long to get your credit counseling certificate. To file under Chapter 13, you must complete a credit counseling course with a government-certified counseling agency. Don’t put it off: the lack of a certificate of completion can cause delays.

2. Paying debts to friends and family. Though it may seem like a good idea to pay back people close to you, all creditors are entitled to a proportionate share of whatever money you have available. If you make payments to friends or relatives within a year of filing, the court may try to recover and redistribute that money among all your creditors.

3. Running up more debt. Don’t use credit cards, get big cash advances, or transfer balances once you’ve decided to file. It’s not fair to your new creditors, and the courts frown on it, especially if the debts are incurred within 90 days of filing.

4. Transferring assets out of your name. Not only does it seem like you’re not playing fair by trying to hide assets, but it’s unnecessary. Remember, Chapter 13 allows you to keep your assets.

5. Not considering timing. To file or to wait? Several factors come into play. If wage garnishment, foreclosure and/or repossessions are on the horizon, file as soon as you can. But if you are filing due to big medical bills and see more in the near future, you may want to wait, since new debts are not protected in the original bankruptcy filing. And if you have a big tax return coming, you may want to consult an attorney to see how that might affect the timing of your bankruptcy.

6. Forgetting to inform all debt collectors and creditors. This tip is for your benefit. Debt collectors have to stop calling you once you’ve successfully filed a bankruptcy petition in court. Don’t forget to tell all your creditors so you can enjoy the peace that bankruptcy affords.

7. Cashing in your retirement account. Remember, in Chapter 13 bankruptcy you get to keep your assets, so your 401(k), IRAs, and other tax-exempt retirement accounts are exempt. If you cash in your retirement account to pay bills, that money is no longer protected.

8. Not filing all required paperwork. Chapter 13 bankruptcy involves a lot of paperwork. The average bankruptcy petition, schedules, and repayment plan covers around 40 pages. If you fail to provide required documents like your bank statements, pay stubs, or tax returns, you may have to pay fees and/or amend your plans. If you make a serious mistake or omission, your case could be discharged, or you may even face criminal penalties. If you decide to file under Chapter 13, it’s wise to consult an attorney.

9. Failing to file on schedule. Another reason to consider an attorney: Chapter 13 not only requires a lot of paperwork, but it needs to be submitted on a specific schedule.

10. Being late on payments. Once you’ve filed Chapter 13, you’re working toward a clean financial slate. Don’t mess it up with late payments. Your first payments to your Chapter 13 trustee are due 30 days after your case is filed. If you have a mortgage payment, it will be due on the next typical payment date after you file; e.g. if you file for bankruptcy on Feb. 21st and your payment is usually due the first of the month, you would make a payment on March 1.

11. Forgetting to complete your post-bankruptcy education course. Bankruptcy is supposed to be a learning experience. That’s why you are required to complete a credit counseling course both prior to and after you file. The court won’t allow you to close your case without evidence that you completed the second course, the Post-Petition Instruction Course Concerning Personal Financial Management.

12. Withholding information from your bankruptcy lawyer. Not only is it vitally important to disclose all pertinent information before filing for Chapter 13, you also need to tell your attorney if something happens later that may affect your financial status. If you lose your job, acquire medical bills, or have unexpected expenses during your Chapter 13 repayment period, you need to deal with it correctly. Your attorney can lay out your options for you.

13. Not being prepared to live on a tight budget. Under Chapter 13, you pay back your creditors with your disposable income. You may need to live with less, cutting back on non-essentials like vacations and cable TV. If these don’t sound like non-essentials, you may need to reassess your lifestyle or consider your ability to complete a Chapter 13 plan.

As you can see, Chapter 13 isn’t a quick fix. It can be a demanding, complicated process. It can also be a learning experience, a way to keep your home and other assets, and most importantly, a way to get back on your financial feet.