Chapter 13 bankruptcy is often ideal if you have a steady income but are struggling to keep up with debts, such as mortgage arrears, missed car payments, or tax obligations. Consulting with a knowledgeable bankruptcy attorney is the best way to determine if Chapter 13 suits your financial situation.
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Chapter 13 Bankruptcy
What is Chapter 13 Bankruptcy?
Individuals who do not qualify for Chapter 7 bankruptcy may file Chapter 13 instead. Chapter 13 is also an option for businesses, but it is far more common for them to file Chapter 11 bankruptcy. Unlike Chapter 7 bankruptcy, Chapter 13 does not involve liquidating the filer’s nonexempt assets. Instead, it consists of creating a debt repayment plan that allows the filer to work through the debt over three to five years with careful budgeting and supervision by a bankruptcy trustee. Some individuals who qualify for Chapter 7 opt to file for Chapter 13 instead because of the filer’s greater control in this process.
We often get asked, Why should I file for Chapter 13? People usually think Chapter 13 is a reorganization and payback of all your debts, but that’s not true. Chapter 13 is a reorganization, but you often do not pay back all your debts. Chapter 13 typically lasts three to five years and is primarily filed to stop Sheriff sales. If your house is being sold, you may think there’s no way to stop it. Filing Chapter 13 gives you up to five years to catch up on your mortgage payments, become current with the mortgage, and keep your house. Often, people file Chapter 13 to stop repossessions. If you’re a couple of months behind in your car, they will take it, file a check with their team, and you can pay off your car over the next five years. If the IRS is garnishing your wages, you can file a Chapter 13, which will stop the garnishment and allow you to pay back the taxes you owe over five years. Often, the interest will stop, and penalties good discharged. Then there’s the determination of how much of those unsecured debts get paid. Unsecured debts include credit cards, medical bills, and payday loans, which are lumped together as an unsecured creditor. The amount of those that get paid back is determined by how much income you have and how much equity is in your assets. So, the more income you have and the more assets you have, the more of those unsecured debts you’ll pay back. If you have minimal income and minimal value in your assets, those unsecured creditors don’t get paid anything. So, if you want to discuss your financial situation, feel free to give us a call.
It is important to note that most Chapter 13 filers do not repay all of their unsecured debt. Generally, a portion of this is repaid, while secured debt is often repaid in full. Unsecured debts are not backed by collateral, such as debts on unsecured credit cards. Secured debts are those that are backed by collateral, like your mortgage.
The Chapter 13 Bankruptcy Process
Like with Chapter 7, you must complete a credit counseling course before filing for Chapter 13 bankruptcy. More than 180 days may not elapse between completing your course and filing your bankruptcy petition. Your debt must also not exceed the following amounts: $1,184,200 for secured debts and $394,725 for unsecured debts.
To file for Chapter 13 bankruptcy, you will need to provide the following:
We understand that bankruptcy can have a negative connotation, but some positives come with bankruptcy. Bankruptcy does not have to ruin you financially.
- Details about every debt you owe;
- Documentation of your income for the previous six months;
- Verification that you filed your taxes for the past four years;
- Your driver’s license and social security card;
- A list of all your assets and monthly living expenses, and
- Certification that you completed credit counseling.
To move forward with your Chapter 13 bankruptcy plan, you must submit a repayment plan and have it approved. Approval of your plan is based on your ability to make your proposed monthly payments based on your income realistically. Your bankruptcy trustee may recommend your play for confirmation by the court, and once it is confirmed, you must adhere to it for the specified period. You will make the payments to your trustee, who will disburse the money to your creditors. Once you file for bankruptcy, an automatic stay goes into effect. This court order prohibits creditors from attempting to collect debt payments from you. Certain collections are not affected by this, though. These include child and spousal support payments.
The court may close your case when you have satisfied the repayment plan. A closed Chapter 13 bankruptcy will remain on your credit report for seven years after completion.
Facts About Chapter 13 Bankruptcy
When most people first learn of Chapter 13 bankruptcy, they have many questions about the process, what to expect, and whether it is right for them. Here are 13 facts you need to know about Chapter 13 to help you become debt-free and determine if it is for you.
- Debtors keep control of their assets: They run their businesses. No trustee is tasked with selling assets. If an asset is worth more than the amount allowed to protect it, the consumer must pay for the value through their plan.
- Repayment to creditors can be minor or even nothing: It depends on the income and the value of their assets. I have filed cases where the consumer pays $1 to unsecured creditors like credit cards, but the results will vary based on available disposable income and household size.
- Chapter 13 plans can be changed during the case: If income falls or is temporarily interrupted, the plan can be changed to accommodate the change by filing a motion to modify your payment plan. If your income falls significantly you could always convert your case to a Chapter 7 bankruptcy if you qualify.
- The case can be dismissed anytime: You can get out of Chapter 13 bankruptcy at any time, unlike Chapter 7 bankruptcy, where you are generally locked into the case. The bankruptcy automatic stay protects the debtor for 3 -5 years while in an active Chapter 13 plan.
- No foreclosures, no repossessions, and no garnishments will be able to hurt you moving forward: Mortgage defaults can be cured over as long as five years. Additionally, you can even request a loan modification. At the same time, in Chapter 13 bankruptcy you can dismiss your case once approved if you feel you don’t need the bankruptcy after obtaining a loan modification. Chapter 13 bankruptcy filings can also be beneficial if you need to stop a foreclosure sale immediately but don’t intend to stay on the repayment plan. This helps if you need to buy some time to short-sell the property or make other arrangements moving forward.
- The interest rate on car loans can be reduced to today’s market rate: This is called a cram down, and the rate used is called the till rate, which is about 3.25%. This can only be done if the car was purchased more than 910 days before filing.
- Underwater mortgage liens can be eliminated forever in Chapter 13 bankruptcy. This usually applies to second mortgages, which can be stripped away by filing a motion to strip the lien. So, if your first mortgage is worth more than your home, you may be able to strip the second mortgage, which would allow the second mortgage to be stripped and treated like a general unsecured creditor who doesn’t need to be paid back in full.
- The IRS must accept the repayment terms in your plan without interest. If the taxes owed are recent, they must be paid in full throughout your Chapter 13 plan.
- Tax debt older than three years: Tax debt older than three years from the date it was due may be discharged in Chapter 13 bankruptcy as long as your tax returns were filed more than two years ago and your taxes have not been reassessed recently. New taxes are considered priority debts and must be paid in full. Older taxes can be treated as unsecured debts like a credit card or medical bill.
- Other than support, certain types of debts to former spouses can be discharged: This is generally not the case in Chapter 7 bankruptcy. If the monies owed are for maintenance or support of children, the debt will never be discharged. If, however, the funds owed are for attorney fees or other non-support payments, the debt may be dischargeable in Chapter 13 bankruptcy.
- If you have had your license suspended, you can get it back by filing for Ch. 13: Some penalties may need to be paid off in your plan, while others may be discharged. Your attorney will need to know about each ticket and number so that they can list them completely in your bankruptcy filing. The court or the department of licensing will need to be notified of your filing and you can provide your case number once your case is filed.
- Attorney fees for the case can be paid after filing. Although most attorneys charge a fee before filing, it may be 1/3 of the total cost. Additionally, the court filing fee of $310 needs to be paid, but in Washington, the court allows you to pay only $100 of the filing fee at the time of filing if you have not had a previous case dismissed without paying the full filing fee.
Work with an Experienced Merrillville Bankruptcy Lawyer
Work with an experienced bankruptcy lawyer to protect your rights throughout the Chapter 13 bankruptcy process. Contact Whitten & Whitten today to schedule your initial consultation in our office.
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