What is Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy is a method of reorganizing your debts over 3 to 5 years. You pay a fixed payment each month to a Chapter 13 Trustee who, in turn deducts a Bankruptcy Court approved 5%-10% fee for his/her services. Then the Trustee makes a payment to all the creditors that are supposed to be paid based on the law and the terms of your Chapter 13 bankruptcy reorganization plan.
Chapter 13 bankruptcy has some real benefits over a Chapter 7 bankruptcy for many people. Among those benefits in order of general importance to most people are as follows:
1. You can save your home from foreclosure. You can take what you are behind on your first mortgage, including foreclosure fees, and pay it off over up to 5 years and keep your home. If your home is not salvageable, you may be able to get several months more in the house for free to prepare for a move;
2. You can often use Chapter 13 bankruptcy to wipe out the mortgages other then the First Deed of Trust (i.e. a mortgage) if you have a home with no equity above that first mortgage.
3. Loans secured by Vehicles, Home Furnishings, or Equipment, can be either kept and paid for over the life of the plan, or given up and treated in the same manner as your other unsecured debt (below);
4. You often can get exactly the same result in a Chapter 13 bankruptcy by being able to wipe out unsecured debt the same as you could if you filed a Chapter 7 bankruptcy. Depending on your income, you can pay as little as nothing to as much as all of your unsecured dischargeable debt (ie. Credit cards, medical bills, personal loans and other debts that would be wiped out in a straight Chapter 7 Bankruptcy);
5. If you have a business that is not incorporated, you can use Chapter 13 bankruptcy to protect it from creditors and allow it to continue to operate;
6. You can get rid of taxes that do qualify to be wiped out (discharged) in Chapter 7 plus you can control the taxes that could not be wiped out in a Chapter 7 bankruptcy and pay them over 5 years with no interest or penalties;
7. You can control student loans that are due and pay them the same percentage amount that you give other non-dischargeable debts. Unfortunately, unlike other unsecured debts that are wiped out at the end of the plan, the Student Loan is unique because it survives the Chapter 13 discharge and can then go back and recalculate all interest and payments as if the Chapter 13 bankruptcy did not happen. You end up still owing the rest of the recalculated debt. That is the bad news. The good news is that you get 5 years protection from the student loans. No harassment. No being turned over to collection agencies or attorneys. That means no collection and attorneys’ fees being added on. While not perfect it is, as the saying goes “better than a poke in the eye with a sharp stick.”
8. You may use a Chapter 13 bankruptcy to protect possessions that a Chapter 7 bankruptcy Trustee would have sold to pay your creditors. Those items are called “non-exempt assets.” Instead, you can use a Chapter 13 plan to pay an amount equal to the value of the possessions that would be sold by the Chapter 7 Trustee and pay that amount over up to 5 years. You can then keep those things that would have been taken from you in a Chapter 7.
Some people will have to use a Chapter 13 bankruptcy reorganization not by choice, but because they fail the “means test” and do not qualify to wipe out their debts in a Chapter 7 bankruptcy. The “means test” is a mechanical test which, if your income is above a set amount for a household of your size, you have to pay an amount each month to a Chapter 13 Trustee for 5 years or until all your unsecured debt is paid in full, whichever is less.
How Much Do You Pay in a Chapter 13 Bankruptcy Plan?
The amount that you have to pay in a plan is calculated using IRS standards for the size of your household in your state. That will calculate a set amount that must be paid to the unsecured creditors who you would otherwise be able to wipe out in a Chapter 7 bankruptcy. It should be noted that this calculation has little, if anything to do with reality.
To be able to file a Chapter 13 bankruptcy your “unsecured” debts must be less than $360,475 and “secured” debts must be less than $1,081,400.
For more on the difference between Chapter 13 bankruptcy and Chapter 7 bankruptcy, check out the Chapter 7 vs. Chapter 13 Comparison Chart on this website.
Additional thoughts on Chapter 13 reorganizations;
What is important to understand is that what you may think is “secured” debt may not be “secured” after all, or what you think is “unsecured” may be “secured.” An example would be a “secured” 2nd mortgage lien on a house where there is no equity above the 1st mortgage. It is treated as an unsecured debt because no equity protects the 2nd mortgage lien.
There are many other examples of where logic stands on its’ head in bankruptcy. In fact, I tell my clients that “Alice in Wonderland” has more to do with reality than do the present bankruptcy laws as rewritten by the credit industry and passed by the “bought and paid for” Federal politicians in 2005.
Do not assume that you can or cannot qualify for a Chapter 13 reorganization on your own. Many times I have had potential clients who tried to determine on their own whether they qualified for a particular type of bankruptcy. In every case where they have done a “means test” calculation, when redone correctly using the “Legal” definitions, their calculation turns out to be wrong.
Often the potential clients went to other bankruptcy attorneys who told them they did not qualify to file a Chapter 7 bankruptcy or that they did not qualify for a Chapter 13 bankruptcy reorganization plan. Sadly, quite often this advice turns out to be wrong. That is due to the fact that many of the attorneys in the field were not practicing bankruptcy law just a few years ago. Other times it is simply that they have not spent the huge amount of time and money it takes to learn what they need to know to do it right. Some just don’t have the ability to think “outside the box” A few can think “outside the box.” Even fewer realize there is no “box.” This is what I try to teach attorneys at my seminars.
There are times where you may clearly not qualify for a reorganization (or perhaps a Chapter 7) now because of the existing debts but could qualify with some planning. The only way to know is to have a highly experienced bankruptcy lawyer review your circumstances in detail and go over your options with you. Only then will you know if you qualify for a Chapter 13 bankruptcy.