Chapter 13 Bankruptcy

Chapter 13 of the Bankruptcy Code allows individuals experiencing financial difficulty to pay their creditors over time, without being subjected to creditor harassment or other collection techniques. Chapter 13 can be as beneficial as a Chapter 7 bankruptcy for people struggling to pay debts. Determining whether to file Chapter 7 or Chapter 13 cannot be done in a vacuum; rather, the decision needs to be based upon your specific circumstances, including your goals.

What is a Chapter 13 bankruptcy?

In a Chapter 13 the debtor makes monthly payments to the Chapter 13 Trustee, who, in turn, pays creditors some or all of their claims according to each claim's status. It is somewhat like a debt consolidation or a program offered by a debt counseling service.

How does a Chapter 13 differ from a credit counseling debt consolidation plan?

In a Chapter 13 case, you are allowed to deduct your actual living expenses (as long as the expenses are reasonable) before calculating the "disposable income" that you must pay to the Chapter 13 Trustee. With a correctly drafted Chapter 13 plan, creditors do not have a choice whether to participate, nor do they have the right to undertake collection outside of bankruptcy. Also, in a Chapter 13, all interest typically stops accruing on unsecured debts and the amount paid on those claims is usually reduced to 5 - 30 % of the principal amount of the claim that was outstanding on the date the Chapter 13 case was filed.

Why Should I File Chapter 13?

Here are some of the factors that should be considered when deciding whether to file a Chapter 13 instead of a Chapter 7.

* Are you faced with a foreclosure or seizure of property? If your home mortgage lender has filed a foreclosure action or if other lenders are repossessing property such as a vehicle, a Chapter 13 proceeding can give you an extended period of time to catch up on the past due amount ("cure the arrearage") so you can keep the property.

* Do you have "non-exempt" property that would be lost in a Chapter 7? As explained in the page concerning Chapter 7, one of the duties of a Chapter 7 Trustee is to "liquidate" non-exempt property, and then distribute the sales proceeds to creditors. If you have property which would be at liquidation risk in a Chapter 7, and you do not want to lose this property, then you will want to consider a Chapter 13. For example, if an individual in Chapter 7 owns a very valuable vehicle free and clear of any loans, the Chapter 7 Trustee may well sell that vehicle. In a Chapter 13 framework, the same vehicle would not be lost; rather the non-exempt value of the car would be paid to the Chapter 13 Trustee over the life of the Chapter 13 plan.

Who May File a Chapter 13?

Only an individual with regular income who owes less than $336,900 in unsecured debt and $1,010,650.11 in secured debt may proceed under Chapter 13. (These dollar amounts can change from time to time based on inflation).

How Does A Chapter 13 Work?

As mentioned above, in a Chapter 13 case, the debtor makes monthly payments to a trustee, who pays creditors. To make these monthly payments, you must have some source of income that is regular, such as employment income or rental income. You are required to pay all of your disposable income to the Trustee for 36 months or more. Before you file your Chapter 13 case, I will advise you of the amount that I have determined you must pay under your plan. On rare occasions the Trustee may disagree with that amount and we may need to adjust the plan payment before the plan is approved by the Bankruptcy Court. If at the end of your Chapter 13 plan, there remains a balance on any unsecured debt, the balance is discharged, and you will not owe it any more. (There are some exceptions, such as student loans, which are not discharged if the entire claim has not been paid). You do not lose any property in a Chapter 13, unless you and I determine that the plan should surrender certain collateral in exchange for satisfying certain secured debt; for example, if you took out a secured loan to buy a dirt bike some years ago and the amount of the loan is now far greater than the value of the dirt bike, you might decide you want to give the dirt bike to the lender rather than continue making the loan payments.

How long does a Chapter 13 plan last?

Typically, a Chapter 13 plan lasts from between 36 months to 60 months. The length of the plan depends on several factors: the amount of your average monthly gross income calculated over the six month period prior to the month of filing, the monthly amount of your disposable income, the amount and kind of debt that you have, and the value of your non-exempt property. The calculations for a Chapter 13 plan can get very complicated and intricate, however, our experienced bankruptcy attorneys will help make the process as simple as possible.

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