What is Chapter 13?
A Chapter 13 Bankruptcy is a repayment plan that reorganizes a consumer's debts and allows them to retain both their real and personal property by consolidating and reducing their debts into one monthly repayment plan. Depending on the type of debt, many debts are not paid as part of the repayment plan and are discharged once the plan has been completed.
Chapter 13 is also called a “wage earner plan”. This label is a little misleading. The primary requirement is that you have regular income. However, regular income can mean unemployment income, rental income or family assistance. The purpose of having an income source is to fund a plan payment which is disbursed to creditors.
Who Can File Chapter 13?
To be eligible, any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual's unsecured debts are less than $419,275 and secured debts are less than $1,257,850. 11 U.S.C. § 109(e). These amounts are subject to change.
Chapter 13 is available to people who have never filed bankruptcy, have not filed a Chapter 7 in the last 4 years, or a Chapter 13 in the prior two years. We measure this from the date of filing of the prior case, not discharge date.
Why file Chapter 13?
We think Chapter 13 is a pretty wonderful financial tool. We think you'll agree, and here are a few examples of why.
Pay a portion of your debt.
Chapter 13 bankruptcy is sometimes referred to as a “repayment” plan because debtors pay some or all of their unsecured debts (interest free) over a 3-5 year plan. Your payment is based on what you can afford to pay (income minus expenses). If you can afford to pay $200.00 a month for 36 months, but your debt totals $100,000.00, the remaining unsecured debt of $92,800.00 is eliminated upon discharge- tax free. Pretty neat. Alternatively, if you negotiate your debt outside of bankruptcy, this cancellation of debt is treated as income to you and you may be taxed on it- where's the fresh start in that?
Strip Unwanted Liens.
Let's say you get sued on a credit card in state court, you ignore it or lose in court fighting about it, and the creditor gets a judgment. This creates a judicial lien on your real estate. Later, you go to sell your home and you find out that the debt has attached to your house and had doubled in size due to the interest. Ouch. The judgment is now referred to as a judicial lien. The credit card judgment obtained in state court automatically creates a lien against your home if the judgment is recorded in the county where your home is located. Now what?
In Chapter 13, there is a process to eliminate liens against your property and treat them the same as general unsecured debt. If you aren't sure if such a lien exists, request a title report. There are numerous rules and pitfalls which is why the assistance of an experienced bankruptcy attorney is advised when filing a Chapter 13 to eliminate liens.
Reduce Negative Equity & Interest Rates on Motor Vehicles
If you have traded in a car for another vehicle and the dealership has paid off a loan on the trade in, it is very likely you have negative equity in your new vehicle. Negative equity means owing more on your car than the vehicle is worth. The negative loan balance you added to your new loan creates this negative equity and provides no new value for the car that you just purchased. Negative equity is usually accompanied by higher interest rate loans, sometimes as high as 29-30%. That's a lot of extra debt and interest over time!
Chapter 13 is an effective tool to retain your motor vehicle while reducing interest rates and eliminating additional negative equity you brought forward in your new loan. Schedule an appointment with one of our experienced attorneys to allow us to show you how this works.
Other Advantages to Filing a Chapter 13
- Creditors must stop contacting you about payment.
- If your spouse isn't on debt with you, they don't have to file a bankruptcy with you.
- You retain your assets including pensions, 401ks, retirement accounts.
- All state court lawsuits, garnishments, or threats of collection stop.
- If someone has co-signed on your debt, the bankruptcy will protect them.
- You can stop home foreclosures and repossessions.
- Property settlements in divorces may be dischargeable (not the case in Chapter 7).
- Repossessed cars may be recovered, but only if you act quickly after repossession.
- Attorney fees can be structured through the plan for pre-filing work, and any future work that is necessary through the Chapter 13.
- If you default on your payment plan you are not immediately terminated from the program, which is often the case in debt negotiation programs.
- Creditors must participate in the program. Creditors do not have to participate in debt consolidation programs.
WHY NOT FILE A CHAPTER 13?
Chapter 13 is not for everyone. Some disadvantages that people see in filing a Chapter 13 vs. a debt workout with their creditors are as follows:
- The minimum period you can be in Chapter 13 is 3 years, the maximum is 5 years. Whether you have a three- or five-year plan is based upon your income in the six months prior to filing of your case. If you make more than the average income for the median size of your household (called “above median income”) you must file a 5-year plan unless you pay back 100% of your creditors.
- You don't receive your discharge for 3-5 years (Chapter 7 is 90 days).
- If you don't complete your plan, any interest that was reduced on a car or liens that were avoided on property reattaches or becomes due.
- You must provide your case trustee with your income tax returns each year. If your income increases by more than 10% from your original budget, you may be required to pay more into your plan towards your debt.
- You have a bankruptcy on your credit history for 10 years.
Use our convenient contact form to schedule an appointment today. We know you have questions – don't be afraid to ask. We are happy to discuss at length bankruptcy and alternatives to bankruptcy to help you make an informed decision. Don't delay, call us today.