Chapter 13 Bankruptcy

Chapter 13 Bankruptcy is significantly different from a Chapter 7 Bankruptcy.  A Chapter 13 is a reorganization of debt, allowing Debtors to repay all or a portion of their debts through a Chapter 13 plan while protecting property and personal assets.  The concept is similar to debt consolidation, but unlike most debt consolidation programs, it permits debtors to pay unsecured debt (i.e. a debt that is not secured by property) down without accruing interest (student loans are an exception) and without having to deal with those annoying calls from debt collectors.  Under a typical plan, you make monthly payments to a court appointed bankruptcy trustee for generally 36 to 60 months.  The amount of your monthly payment is determined by several factors such as the amount of debt you have, your ability to repay and the extent that you have assets.  Once a Chapter 13 repayment plan begins, a trustee will disburse the monthly payment made by the debtor to the creditors on monthly basis.

Is a Chapter 13 Bankruptcy Right For You?

If you choose to file a Chapter 13 Bankruptcy, the court will require you to use your income to repay some or all of you debt.  This means you have to prove to the court that you can afford to meet your repayment obligations.  Don't let this scare you.  A Chapter 13 repayment plan is based upon how much you can afford to pay back based on your monthly living expenses.  The court essentially allows you to pay back as much as you can afford over a 3 to 5 year time period.  At the end of this time period, if you completed your payment plan, the court will discharge the rest of your eligible unsecured debt.  If you cannot afford to pay back any of your debts, you may be able to qualify for a Chapter 7.

Stop Foreclosure on Your Home Immediately

A Chapter 13 offers individuals an opportunity to save their homes from foreclosure.  By filing a Chapter 13, debtors are allowed to repay their arrears (i.e. overdue/ past due payments) over 3 to 5 years, which allows individuals to save their homes.  Chapter 13's may also allow a homeowner to avoid refinancing and surrendering the equity they have built in their homes.  Debtor's can instead save their equity and pay their arrears back in their Chapter 13 Bankruptcy.

Save Your Car from Repossession

If you have fallen behind on your car payments, a Chapter 13 may allow you to save your car from being repossessed.  A Chapter 13 will allow you to reinstate your original loan agreement and to make up missed payments over time.  Under certain circumstances an experienced attorney may even be able to recover your vehicle after repossession, and consolidate the remaining balance.  In some cases you may also be able lower your car payments and pay back a figure based on the actual market value of the car as opposed to what you owe pursuant to the initial loan.  You will need to contact an experienced bankruptcy attorney to see if this is an option for you.

Pay Back Income Taxes

Typically debts that you owe to the government are not dischargeable, however including them in your Chapter 13 plan may have many benefits.  More specifically, Chapter 13 bankruptcy freezes interest and penalties on taxes.  This will allow your payments to go directly to the principle, greatly reducing your interest and penalty burden.  Chapter 13 will stop the government from adding more penalties and interest to your back taxes.

Chapter 13 and Student Loans

In most circumstances, a bankruptcy court will require repayment of student loan debt.  Chapter 13 bankruptcy rules treat student loan debt similar to priority debt--it is payable in full like back taxes and child support payments.  Prior to 2005, student loan debt was only dischargeable when funded by a private lender.  With the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act, however, privately funded student loans are now treated the same as student loans guaranteed or issued by the federal government.  This means that all student loan debt is only dischargeable upon a showing of undue hardship.

Typically, it is difficult to convince a bankruptcy court to discharge student loan debt.  A bankruptcy court will consider such factors as poverty, the inability to pay the loan due to a permanent disability, and a debtor's good-faith effort to repay the loan for a long period.  To have a student loan debt dismissed, a debtor must file a separate action in bankruptcy court called a Complaint to Determine Dischargeability of a Debt.

Protect Your Co-Signers

Did a family member or friend co-sign on a loan for you, that you are now having trouble paying for?  Are they receiving harassing creditor calls and threats from creditors?  Filing a Chapter 13 will protect your co-signers from receiving those harassing collection calls and efforts.  A Chapter 13 allows you to pay the remaining balance on those loans over 3 to 5 years and in some instances with no interest.  Call one of our attorneys to find out how.

Questions & Answers

 1. What is stable and regular income?

Stable and regular income is income from regular wages or salary, income from self-employment, wages from seasonal work, commissions from sales or other work, pension payments, Social Security benefits, disability or workers' compensation benefits, unemployment benefits, strike benefits, public benefits (e.g. welfare payments), child support or alimony that you may receive, royalties and rents, and proceeds from selling property.

2. What is considered disposable income?

Disposable income is the money left over after you pay for basic human needs.  Examples of these necessities include: food, mortgage or rent, utilities, transportation, insurance, certain allotted installment payments.  These basic needs are taken into consideration in formulating a plausible Chapter 13 proposal.

3. How much will my plan payment be?

The monthly plan payment is based on the amount of debt you have and how much you can reasonably afford to pay.  In some circumstances your payments will be enough to pay off all your creditors.  Some debt need not be paid in full and can be paid pennies-on-the-dollar.

4. What kind of debt is dischargeable?

Dischargeable debt includes unsecured debt (e.g. credit card debt, medical bills, some taxes, etc.).  While student loans and liens are not dischargeable, they can be paid through a Chapter 13 plan.

5.  If I miss a scheduled payment under my Chapter 13 repayment plan, can a creditor begin collection activities?

Should a debtor miss a scheduled payment, Chapter 13 bankruptcy rules allow the trustee to institute an action for dismissal with the bankruptcy court.  Because the debtor agreed to repay creditors according to a court-approved Chapter 13 repayment plan, a trustee may request the dismissal of the case once those creditors are no longer receiving payments.  A debtor may be able to prevent the dismissal of a case by establishing their ability to repay the debt under the current plan or by requesting that the court approve a new plan.

If the bankruptcy court dismisses the case, a creditor may reinstitute collection activities against the debtor.  Bankruptcy laws that prohibit collection attempts no longer protect the debtor at this point.  Consequently, creditors may collect the current amount owed on the debt and any interest on the debt that accrued while the debtor was in bankruptcy.