What Is Chapter 13 Bankruptcy?
Filing for Chapter 13 bankruptcy gives you immediate protection from creditor harassment, collections activity, collections calls, wage garnishment, bank levy, and can even stop a pending home foreclosure or car repossession. The end result of a successful Chapter 13 bankruptcy is a discharge. This is a court order that eliminates most legally binding debts such as credit cards, hospital bills and medical bills, deficiency balances, and even certain tax debts. While a Chapter 7 is a short proceeding that is usually over in 3 to 4 months, Chapter 13 involves a repayment of some or all of a person’s debts through a payment plan (referred to as a “Chapter 13 Plan”) that lasts between 3 and 5 years. While the prospect of a 3-to-5-year repayment plan is not appealing to many people, it does have some important advantages over a Chapter 7.
WHY FILE FOR CHAPTER 13 BANKRUPTCY?
The simple answer: to stop your creditors’ collection calls, harassment, bank account levies, and wage garnishments, and to prevent vehicle repossession and home foreclosure. Filing bankruptcy gives you immediate protection from your creditors. It also has some additional specific benefits that are reasons to file for Chapter 13 bankruptcy relief:
- A Chapter 13 plan can be used to catch up on mortgage payments and prevent foreclosure. A Chapter 13 plan can set up a repayment of mortgage arrears over a period of many months or even years to allow you to catch up on your mortgage payment slowly, at a rate you can afford, rather than the steep repayments demanded by a mortgage company.
- A Chapter 13 plan can be used to catch up vehicle loan payments and prevent repossession. A Chapter 13 plan can set up a repayment of car loan arrears over a period of months or even years to allow you to catch up on your car payment slowly, at a rate you can afford.
- A Chapter 13 plan can be used to “cram down” or reduce the interest rate on your vehicle loan. If your vehicle loan is at a high interest rate, a Chapter 13 plan can enable you to pay off your vehicle at a much lower interest rate.
- A Chapter 13 plan can be used to “cram down” the amount you owe on your vehicle to the value of the vehicle, rather than the amount left on your loan. This works if you have owned the vehicle for more than 910 days, and your vehicle is upside down – it is worth less than you owe on it.
- A Chapter 13 plan can protect you from the aggressive collection actions of the IRS and Department of Revenue and let you pay your taxes back over the length of the Chapter 13 plan.
- When a person makes too much income to qualify for a Chapter 7, but does not make enough to pay all their creditors the monthly payments as demanded, a Chapter 13 offers a middle ground – you can pay what you can pay based on your real-world budget, rather than what your creditors demand that you pay.
- When a person would lose non-exempt assets in a Chapter 7, filing Chapter 13 can allow the person to keep their assets, and pay their creditors a reasonably equivalent amount over the life of the Chapter 13 plan.
- When a person has filed Chapter 7 within the last 8 years, they can still file a Chapter 13 bankruptcy and get protection from their creditors.
- Chapter 13 can put student loans on hold for several years to allow the person to deal with them more effectively in the future when their income has increased.
DO I QUALIFY TO FILE FOR CHAPTER 13 BANKRUPTCY RELIEF?
Your unsecured debts must be less than $419,275 and your secured debt less than $1,257,850 (that would be most of us). These limits are for noncontingent, liquidated debts (meaning the amount and your liability for your debts has actually been determined).
You must have “regular monthly income” sufficient to be able to afford to pay your monthly living expenses and be able to pay the monthly Chapter 13 payment.
You can file a Chapter 13 even if you aren’t eligible to get a discharge in the case because you have filed a prior bankruptcy too recently (you aren’t eligible for a discharge in a Chapter 13 if you have filed a Chapter 7 in the 4 years before you file the Chapter 13, or you filed a Chapter 13 in the 2 years before you file the Chapter 13). Even if you aren’t eligible for a discharge, a Chapter 13 can provide you protection from your creditors during the Chapter 13.
HOW MUCH WILL MY MONTHLY CHAPTER 13 PAYMENT BE?
Your Chapter 13 payment is based on your real-world budget. We use your actual income, taxes, deductions, etc. to arrive at your net expected monthly income, and then list your expected monthly living expenses. The remainder would be your Chapter 13 plan payment.
HOW LONG WILL I HAVE TO MAKE MY CHAPTER 13 PAYMENT?
If you are under the median income for your family size, the Chapter 13 plan can be as little as 36 months and if you are over the median income for your family size, it must continue for 60 months. The maximum Chapter 13 plan length is 60 months.
DO I LOSE ASSETS WHEN I FILE FOR CHAPTER 13 BANKRUPTCY?
No, you do not lose assets in a Chapter 13 case. However, your Chapter 13 plan must propose that your unsecured creditors receive as much money through your Chapter 13 plan payments as they would have received if you had filed a Chapter 7. Thus, if you have assets that the Bankruptcy Trustee could take in a Chapter 7 case, your plan has to pay the value of those assets to your creditors.
IS CHAPTER 13 WORTH IT?
Yes. We often get this question from clients who hope to file Chapter 7 but are told that they don’t qualify. When we explain the Chapter 13 plan and how the Chapter 13 works, most clients agree that Chapter 13 is a better alternative than not filing bankruptcy. Phone calls and harassment stop, their monthly payment is manageable and based on their budget, and they have a 5-year maximum time horizon until discharge.