CHAPTER 13
Chapter 13 is a section of the Bankruptcy
Code which helps qualified individuals, or small proprietary business
owners (NOT a corporation or partnership), who desire to repay their
creditors but are in financial difficulty. Among other things, it
offers great opportunities to pay off past due mortgage or car payments
over 36-60 months, giving you time to catch up and keep your property.
It is often referred to as a "mini Chapter 11" because you usually
repay something to your creditors and you retain your property and make
payments under a Plan.
To be clear: Chapter 13 bankruptcy is a debt repayment plan for individuals, but often times the repayment can be anywhere from zero to 100% of your unsecured debt.
For the government's explanation of Chapter 13, the process, its benefits and other important information, CLICK HEREChapter 13 vs. Chapter 7 - One
purpose of a chapter 13, as opposed to a chapter 7, is to enable a
debtor to retain certain assets (for example, your home) that might
otherwise be liquidated by a chapter 7 Trustee. It also provides an
alternative to Chapter 7 when you have too much "disposable income"
(your net monthly income exceeds your net monthly expenses by too much)
and usually yields much lower monthly payments than you were previously
paying and (here's the real benefit), after 36 months, you are done!
Your debts are gone. (See below) It also enables you sometimes to
discharge debts that would not be discharged in a Chapter 7, such as a
fraud judgment, certain tax obligations, fines, penalties, and other
debts. [As of October 17, 2005, these additional dischargeable debts
will no longer be dischargeable in Chapter 13--meaning they will need
to be paid 100%].
The goal of most any personal bankruptcy is to
discharge your existing debts by repaying all or a portion of your
debts, and allow you a *fresh start* on your finances. In other words,
once your discharge is granted, you no longer need to repay the debts
that were incurred before you filed your bankruptcy.
Assuming
you need to file a bankruptcy, the only way to determine which Chapter
to file under is to first compare your options under the other
available Chapters and be sure you have consulted with an experienced
bankruptcy attorney to properly analyze your options.
Who may file Chapter 13 bankruptcy?
Only an individual with regular income who owes, on the date you
file the petition, less than $307,675 in unsecured debt and $922,975 in
secured debts. The debts used to calculate these limits must also be
noncontingent and liquidated, meaning that they must be for a certain,
fixed amount (or easily determinable amount) and not subject to any
conditions or bona fide disputes. If they are legitimately disputed or
not liquidated, then those amounts may not be factored into the debt
limit calculations.
For cases filed after October 17, 2005, you may be required to do a
Chapter 13 if your annual income exceeds the median income for the
region where you are filing and if the "means test" shows you have more
than $100-$167 per month to pay to your creditors. Also at that
time, your allowable monthly expenses will primarily be whatever is
allowed under local IRS guidelines.
What are the benefits of Chapter 13?
Chapter 13 protects individuals from the collection
efforts of creditors; permits individuals to keep their real estate and
personal property; and provides individuals the opportunity to repay
their debts through reduced payments.
You may be able to discharge debts in a Chapter 13 that would be nondischargeable under other chapters, for example, fraud judgments and certain tax obligations.
You
may be able to get rid of junior liens on your real property. If the
fair market value of your property is less than the total amount owed
to the 1st mortgage, then you can eliminate the security interest to
any junior lienholders and treat them as general unsecured creditors in
your plan (thereby being able to possibly pay them less than 100%).
Certain tax repayments can be made easier by virtue of elimination of interest payments.
How does Chapter 13 work and how long does it last?
First
of all, you must have "regular income". Meaning, you must have some
source of income that is regular, or at least can be averaged regularly
on an annual basis, for example.
You are usually required to pay
all of your disposable income to the Trustee (through your Plan) for 36
months (see below). Your disposable income is defined as: income
received by you that is not reasonably necessary for the maintenance
and support of you or your dependents. The key word in the definition
is "reasonably". For example, if you are used to spending $2,000 a
month on a car, you would not be allowed that much of an expense for
that since that is not considered "reasonable". This is calculated by
taking your monthly income and subtracting your reasonable monthly
expenses. If you are interested in a consultation on
Chapter 13, you should complete these forms prior to consultation. Visit my consultation page for information.
Typically,
the Plan payments last for 36 months, unless additional time is
requested, but in no event will they last more than 60 months.
Therefore, if your payment analysis shows, for example, that you can
afford to pay $200.00 per month (above and beyond your normal living
expenses), you would pay that each month to the Chapter 13 Trustee, who
would disperse it pro rata among your creditors. At the end of 36
months, you are discharged from all dischargeable unsecured debts,
regardless of how much your creditors have received.
In addition
to your plan payments, you must stay current with any ongoing
obligations you have to secured creditors, such as on your mortgage.
Chapter 13
(or any chapter of bankruptcy for that matter) only affects debts that
you owe on or before you filed the bankruptcy. Therefore, on your
mortgages and other secured debts, your monthly Plan payment goes to
pay any arrearages (past due amounts) that existed on the date you file
and you can repay that arrearage over the life of the Plan; but, you
must stay current from the filing date forward with any mortgage
payments, etc.
Secured debts (your mortgages) must be repaid in
full, but Chapter 13 enables you to cure the defaults (reinstate the
loans) over 36 months (or up to 60 months with creditor consent and
court approval). You also have the ability to eliminate junior liens
from your real property under certain circumstances and restructure
mortgage and certain other payments. (Click here for more information
on this!!)
Another thing to bear in mind is that approval of ANY
Chapter 13 Plan of repayment requires a determination by the court that
the case is filed and the plan proposed in Good Faith. I won't try to
define that for you on this website, but remember that nothing is
automatic.
How much will I have to pay each month?
The size of your
monthly plan payments is determined by the amount you can afford to pay
after paying necessary living expenses (including insurance, mortgage
payments, etc.). You must prove your income to the Trustee. Usually
this is done with paycheck stubs. In the case of a business, you would
need to average out your income and expenses for the last 6-12 months.
When calculating monthly expenses you should include everything you pay
money for such as food, clothing, utilities, auto maintenance, etc. You
cannot include payments on unsecured debts, since those will be
discharged in the bankruptcy. Also, deductions from your payroll for
retirement accounts are considered voluntary and, therefore, will be
added back in to your total income. Assessing the amount you will pay
in a Ch. 13 is very tricky and is one of the reasons you need an
experienced attorney.
Another "catch" is that you must pay out
at least as much in the Chapter 13 Plan as your creditors would have
gotten if you filed a Chapter 7. Therefore, if you have a lot of
non-exempt assets, you would need to account for this in your plan.
Depending on what your disposable income is (see above), you may have
to sell some of your non-exempt assets to fund your Chapter 13 plan. If
this is the case, you might just as well file a Chapter 7, but not
necessarily.
If you miss any payments at all that are due under your Plan, your case will be dismissed by the Court.
You
cannot borrow money (incur new debt) exceeding approximately $250.00
during the pendency of your case (usually 3 years), without first
obtaining court approval. This can be somewhat of a problem if, for
example, your car lease expires and you need to get a new car during
this period.
What debts can be discharged in Chapter 13?
First of all, any debt that you CAN discharge in a Chapter 7, will also be dischargeable in a Chapter 13.
IN ADDITION, CHAPTER 13 ENABLES YOU TO DISCHARGE**:
**Please note that most if not all of these
additional dischargeable debts will no longer be dischargeable for
cases filed on or after October 17, 2005. This means that they
will need to be paid 100% through whatever Plan you are proposing over
36-60 months.
Debts incurred by fraud or false representations, embezzlement or larceny;
Income Tax debts
that are over 3 years old from the date the returns were last due
(usually April 15 of a given year) and that were either never assessed
or assessed more than 240 days prior to the filing of the bankruptcy
case--even if you never filed the returns. Assessment dates of a tax
can only be determined by obtaining a transcript of your taxes from the
taxing agency in question (and for state entities, sometimes that isn't
even sufficient.
Sales and excise taxes that are over 3 years old from the date the transaction occurred giving rise to the tax, or from the date the returns were due;
Debts incurred by willful and malicious injury to another person or their property and others.
common misspellings: bankrupsy, bankruptsy, bancrupcy, bankrupcy
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