Chapter 13 bankruptcy is personal financial reorganization, and involves a three- to five-year court-approved payment plan. Contrary to popular belief, you do not have to repay creditors fully if you are in a Chapter 13 bankruptcy case. In fact, in many cases unsecured creditors such as credit cards and medical creditors get nothing back, and their debts are wiped out without a payment.
Also, contrary to another popular belief, a Chapter 13 payment does not have to be large. In fact, the bankruptcy trustee always wants to make sure that the payment is doable for you and will fit within your budget before recommending approval of the proposed plan to the judge.
A Chapter 13 payment varies from case to case depending on your particular situation ( for more details, see: How much do people pay back in a Chapter 13 case? ), and can be less than a hundred dollars per month.
Read more about the benefits of filing Chapter 13 bankruptcy below, and about other topics associated with bankruptcy.
Through a Chapter 13 Bankruptcy Case, You Can Accomplish Everything that a Chapter 7 Would Do, and More.
Similarly to Chapter 7, Chapter 13 bankruptcy case would help you to:
Stop creditor harassment as soon as the case is filed
Wipe out credit cards, medical debts, payday loans, personal loans and other unsecured debts
Eliminate repossession and foreclosure debts
Stop garnishments, bank levies and halt lawsuits
Start saving money sooner
Start rebuilding your credit
Unlike Chapter 7, Chapter 13 has the added advantage of helping you to
Protect more property from creditors’ reach
When you file bankruptcy, your bankruptcy attorney provides a list of your assets to the court and also provides a list of claimed exemptions. These exemptions help explain why you need specific assets, and why they should be shielded from the creditors’ reach.
If you have something really valuable or unique that cannot be exempted, then a Chapter 7 bankruptcy trustee gets to sell that non-exempt property and distribute the funds among creditors. This is a fairly uncommon scenario since the exemptions are quite generous, and usually it is possible to exempt all of your savings and property.
If you do have something that you want to keep and that is worth more than exemptions allow – for example, a home with significant amount of equity or valuable stocks that you believe would be even more valuable in the future – Chapter 13 bankruptcy case may be a better bet for you.
The more valuable non-exempt property you have, the more your creditors get paid though the Chapter 13 plan, but you do not lose any of your property.
Protect your business and avoid interruption of business activities
Your business may be negatively affected by a Chapter 7 bankruptcy case.
If you have valuable business property or inventory that you are not able to exempt, then you would lose it or have to buy it out from the trustee in a Chapter 7 case.
Additionally, the Chapter 7 trustee may order you to stop operating your business for some period of time while she administers your assets. If your business is of a type that needs to run continually so as not to lose customers and to stay open during certain hours, such as if you have a gas station or a café, then this may become a big issue.
When you file Chapter 13 bankruptcy case, you do not have to stop operating your business and you do not have to part with any of your business assets. For this reason, the more involved your business is, the more business equipment, inventory, employees or regular customers you have, the more likely it is that filing Chapter 13 bankruptcy could be a better choice for you.
Repay recent tax debts and satisfy tax liens
If you have recent tax debts, you can repay them at 0% future interest through the Chapter 13 plan. The penalties and some interest that have already accumulated can be wiped out. Old tax debts may be completely erasable.
You can take care of tax liens by repaying the value of the liens at low interest through the Chapter 13 plan.
Void home equity loans or second mortgages
If your home is worth less than the balance on the first mortgage loan, and you wish to keep the home, Chapter 13 bankruptcy may be used to erase the junior liens on your home, commonly known as home equity liens or second mortgages.
Catch up on mortgage payments at 0% interest
If you are behind on mortgage payments and wish to keep your home, you can use the Chapter 13 plan to pay back the arrears at 0% interest over a period of three to five years.
Even if the bank has already sent you a notice of default or scheduled a foreclosure sale, filing Chapter 13 bankruptcy can intervene to stop the foreclosure and cure the default.
Catch up on car loan payments and repay car loans at low interest
If you are behind on car loan payments and wish to keep your car, you can use the Chapter 13 plan to catch up. Better yet, you can repay the entire car loan though the Chapter 13 plan at low interest (currently around 5%). In some situations, it may be possible to cram down the principal on your car loan.
Continue with your car loan with no strings attached and no reaffirmation agreements
If you have a car loan, want to keep the car and are in a Chapter 7 bankruptcy case, many banks would want you to sign the so-called reaffirmation agreement which says that you agree to be liable for the car loan despite the bankruptcy.
While this sounds benign in theory, it also means that the bank can try to collect the loan deficiency in the future if you are not able to make car loan payments because of sickness, unemployment or any other reason. Reaffirmation agreement has to be filed with the court, and may need to be approved by the judge. The judge would not allow the reaffirmation agreement to go through if he thinks it is a financial burden to you. If you do not want to sign the reaffirmation agreement or if the judge does not approve it, then the car lender has the right
to repossess the car even if you stay current on payments. If you are in a Chapter 13 bankruptcy case, this issue does not come up. You still need to propose a payment plan which makes sense and which is doable for you, but you do not have to sign a reaffirmation agreement for the car and you can walk away from the car and the car loan for any reason without liability.
Discharge a broader range of debts
Some debts can be discharged through a Chapter 13 bankruptcy case, but not a Chapter 7 case. One common example is marital settlement debt, as long as it not in the nature of child support or other domestic support obligation. Another example is some of the penalties and interest associated with tax debts.
Clear bankruptcy from your credit report sooner
Record of Chapter 7 bankruptcy case stays on your credit report up to 10 years. In contrast, record of completed Chapter 13 bankruptcy is removed faster – typically, 7 years from the date you file Chapter 13 bankruptcy petition with the court.
Typically, a Chapter 13 payment would go towards paying back your car loans at low interest, catching up on mortgage at no interest, and repaying tax debts at little or no interest. All or most of the fees of the Chapter 13 bankruptcy attorney can be included in the Chapter 13 payment plan, and the court sometimes may allow the plan to be used just to pay for the legal fees if it makes sense for the person and he or she has low income and few assets.
Your payment depends on several main factors: how much the court believes you can afford to pay back; what assets you want to keep and pay for through the Chapter 13 plan; and whether you have any “priority” creditors, such as the IRS, who expect to get paid through the plan.
To calculate how much you can afford to pay back, the court looks at your household’s size, household’s income, expenses, value of assets, your recent history of payments to creditors and your recent history of gifting or selling your assets. Your plan payment would be higher if you have high income or assets of high value, if you recently made large payments to some of the creditors but not the others, and if you gifted or transferred away significant amounts of money or property.
You may have a choice in terms of what is included in your Chapter 13 payments. For example, with a car loan, you may decide to surrender the collateral, to repay the loan through the Chapter 13 plan or to continue paying the lender directly.
To find out what creditors you can repay or have to repay through your Chapter 13 payment plan, discuss your situation with a Chapter 13 bankruptcy attorney.
Here is an example: assume Jane owes $4,500 to the IRS for last year’s taxes, and she also owes Ford Credit $10,000 at 15% APR for her 2006 Ford Explorer.
Jane decides to file Chapter 13 bankruptcy case to repay her taxes and her car loan through the Chapter 13 plan.
Her taxes will be repaid at 0% future interest, while her car loan interest would be reduced to 5%, and the term of the loan would be stretched out. Assume that at the time Jane decides to file Chapter 13 bankruptcy case, attorney fees for a Chapter 13 case such as hers are $4,150, all of which are included in her Chapter 13 plan so that Jane does not pay any attorney fees upfront. Assume that Jane qualifies not to pay anything back to unsecured creditors such as credit cards. In that case, after accounting for the bankruptcy trustee’s administrative costs, her Chapter 13 plan payment would be approximately $365 per month over five years.
Now suppose that Jane’s hours have been cut by her employer and she realizes that she cannot afford to keep her Ford Explorer. If she returns the vehicle to Ford Credit, then she will no longer have to pay anything for the car loan and her Chapter 13 plan payment could be decreased to $160 per month – or possibly lower, depending on how far along the case is.
Jane does not have an option of excluding IRS from her plan, but potentially she may have an option of converting the case to Chapter 7 if even $160 per month is too burdensome. If she converts the case to Chapter 7, then after the case is done, she would have to set up some kind of payment arrangement directly with the IRS.
If you live in the Bay Area, are considering filing Chapter 13 bankruptcy case and would like us to calculate what your estimated Chapter 13 payment would be, schedule a free initial consultation with our bankruptcy attorney.
Should you file Chapter 7 or Chapter 13?
This depends on your needs, the nature of your debts and on what Chapter you qualify for. Qualifying factors are generally your level of income; the amount of your debt; and whether you received a discharge of your debts in another case.
Having higher income and having recently received a discharge in another bankruptcy case would steer you towards Chapter 13, while having excessive debt which exceeds the court’s Chapter 13 limits, would steer you towards Chapter 7. It is not unusual to qualify for both Chapter 7 and Chapter 13, but depending on your specific needs and preference, one of these would be a better fit for you.