What Is Chapter 13 And What Does Filing Chapter 13 With An Attorney Allow You To Do?:
- –Protect and keep all your assets
- -Stop Foreclosure Sales and catch up on past due mortgage payments over time
- -Remove Liens, such as second mortgages, on your property
- -Discharge unsecured debts (such as credit cards, medical bills, certain taxes, and more) by doing an affordable repayment plan from 0%-100% (depending/based on your income and value of assets).
- -Repay debts with zero percent interest!
- -Pay a Portion Of Your Attorney’s Fees Over Time
- -Eliminate tax penalties where the underlying tax debt is not dischargeable.
- -And much more
Overview of Chapter 13
Chapter 13 is a section of the Bankruptcy Code which helps qualified individuals, or small proprietary business owners (but NOT corporations or partnerships), who desire to repay their creditors but are in financial difficulty.
It is essentially “pay what you can afford” for a specific period of time (36-60 months), after which you are discharged from the remaining balance of certain debts. (See more details below)
Among other things, it offers great opportunities to pay off past due mortgage arrears or car payments over 36-60 months, giving you time to catch up and keep your property. It is sometimes referred to as a “mini-Chapter 11” by many bankruptcy attorneys and lawyers because you usually repay something to your creditors and you retain your property and make payments under a Plan.
The Chapter 13 Repayment Plan
In Chapter 13 you propose a debt repayment plan, but the repayment can be anywhere from 0% to 100% of your unsecured debt, depending on your budget and value of your assets.
But even if you have to pay 100% in a Chapter 13 case, this is often a much better deal than trying to repay your creditors outside of bankruptcy, because you pay zero percent (0%) interest in a Chapter 13 case.
A bankruptcy attorney can determine what your payment is likely to be and whether it makes sense in your case.
Chapter 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 36-60 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 parking tickets, non-criminal fines, certain debts incurred through divorce proceedings, and debts incurred through willful and malicious injury to another.
The goal of most any personal Chapter 13 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?
Corporations and partnerships cannot file Chapter 13.
A new law was just passed increasing the debt limits for Chapter 13! For cases filed after June 21, 2022, any individual (or married couple) with total debts, secured and unsecured, of less than $2.75 Million can file for Chapter 13. This increase will last until June 21, 2024, and will hopefully be extended then.
But for the moment, for cases filed after June 21, 2024, the eligibility will revert to individuals (or married couples) with regular income who owe, on the date you file the bankruptcy case, less than $419,275 in unsecured debt and $1,257,850 in secured debts.
What Are Some Of 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 not be dischargeable under other chapters such as, for example, marital dissolution equalization payments, parking tickets, non-criminal fines, and some others.
You may be able to get rid of junior liens on your real property (known as a “lien strip”). 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, and tax penalties can be eliminated even on tax debts which are not dischargeable.
How does Chapter 13 work and how long does it last?
First of all, you must have “regular income”. This means you must have some source of income that is regular, or at least can be averaged regularly on an annual basis, such as for those who are self-employed.
You are usually required to pay all of your disposable income to the Trustee (through your Plan) for 36-60 months (see below).
Your disposable income is defined as: income received by you in the 6 calendar months prior to filing (see current monthly income) minus expense that are 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”. Many of the figures used in this calculation are fixed amounts generated by the Internal Revenue Service based on geographic location. They aren’t necessarily what your actual expenses are. This is one of the big changes under the 2005 new bankruptcy laws.
The Chapter 13 Repayment Plan
Plan payments last for 36 to 60 months, depending on certain numerical eligibility requirements.
Therefore, if your payment analysis shows, for example, that your disposable income is $200.00 per month (above and beyond your normal living expenses), you would pay that each month to the Chapter 13 bankruptcy Trustee, who would disperse it pro rata among your creditors.
At the end of 36 (or 60) 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. More on Removing Junior Liens
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 You Have to Pay Each Month?
The size of your monthly plan payments is determined in part by the amount of your disposable income (see above). If your current budget shows you can afford to pay more than that amount, the Trustee in your case will seek to have your payment amount increased (if you are paying less than 100% of your unsecured debts through the plan). Assessing the amount you will pay in a Ch. 13 is very tricky and is one of the reasons you need an experienced lawyer and 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 case. 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 $500.00 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.