Chapter 13 is my favorite type of bankruptcy. Most people file Chapter 7 because they prefer a quick and easy Chapter 7 over making payments in a Chapter 13. But if you don’t qualify for Chapter 7, the choice between filing Chapter 13 and not filing at all should be an easy one – file Chapter 13.
There are so many advantages to Chapter 13 bankruptcy over the alternatives of debt settlement or doing nothing. Secured debt can be restructured and unsecured debt can be discharged, all while taking advantage of the automatic stay that prevents continuing debt collection. In fact, there are many reasons why filing Chapter 13 is preferable to Chapter 7.
The ability to repay non-dischargeable debts like taxes, child support obligations and student loans; strip off mortgages and discharge property settlement debts; “cram down” debt and interest rates on some vehicles; repay pension loans and exclude child support income all make Chapter 13 an attractive option. In addition, there are increased protections for co-debtors, reduced impacts on credit scores and the ability to deal with complex issues like excess equity in a homestead. None of these benefits can be accomplished in Chapter 7 so don’t stop considering bankruptcy just because Chapter 7 isn’t an option.Below are some frequently asked questions about Chapter 13.
Chapter 13
Although permission from the Court is needed to buy or sell property, it’s generally not difficult if the purchase or sale is reasonable, even if it means needing to reduce the Chapter 13 plan payment. Many of our Chapter 13 clients have had to buy vehicles or sell houses while in Chapter 13. To accomplish this we need information about the property to be sold or purchased, such as price, what type of property (e.g. make and model of vehicle or legal description of house) and the terms of the sale or purchase (e.g. monthly payment, interest rate, name and address of lender). If there’s an offer to purchase or loan documents, we’ll need copies to provide the trustee. The approval process generally takes 30-45 days so nothing can happen immediately but there are rarely objections to these types of requests. If the purchase of property will require a change in the plan payment we’ll also need to file a motion to modify the Chapter 13 plan.
If something unexpected happens that causes a short term financial emergency like unusually high medical bills, house repairs or a tax bill, we can ask the court to approve a suspension of plan payments while you deal with the short term financial crunch. We still need you to contact us so we can promptly file the appropriate motion with the court.
In Chapter 13 a portion of the debt is paid over a 3 or 5 year plan period. The length of the plan depends on whether household income is below or above the median income for the household size. Below-median debtors only have to repay debts for three years while above-median debtors must repay for five years. A plan can be extended from three years to five if additional time is needed to cure mortgage defaults or repay nondischargeable taxes. Payment plans can’t go beyond five years.
The amount of the monthly plan payment is the balance left over each month after all expenses are paid. In other words, gross monthly income minus all payroll deductions like taxes, medical insurance, retirement accounts and child support results in net monthly income. From that net income all living expenses like costs for food, clothing, transportation, mortgage or rent are deducted. The amount left over is called “disposable income” and that’s the amount paid to the Chapter 13 trustee for disbursement to creditors. There’s no required percentage of debt that must be repaid.
If your income is high enough and your debts low enough to repay all debts, you may have a plan payment that’s less than disposable income, creating a savings. You never need to repay more than the amount of the debt plus trustee’s and attorney fees. If you’re not paying back 100% of your debt with plan payments tax refunds received during the plan period will also have to be turned over. Since unsecured debts are repaid at 0% interest, the ability to make payments to creditors for 3-5 years, with any debt remaining after the plan period discharged, filing Chapter 13 means it’s far more feasible than most debt management plans that require full repayment of the debt, plus interest.
If a change in the financial situation is permanent and sufficient to allow you to qualify for Chapter 7 we can consider converting the case from Chapter 13 to Chapter 7 anytime during the plan period. The conversion would terminate the Chapter 13 plan and discharge the debts just as if you had started out in Chapter 7. It may also be possible to add debts incurred after the Chapter 13 bankruptcy was filed.
Conversion to Chapter 7 may not always be the best strategy though, even if you qualify for Chapter 7. The ability to repay taxes, cram down loans on vehicles and cure mortgage defaults might make staying in Chapter 13 the wiser approach. There will also be additional legal and court fees before a case can be converted to Chapter 7. If you’re struggling to make the plan payment or foresee a change in income or expenses contact us as soon as possible to discuss all the options.
Lots of things can happen while in a Chapter 13 plan. It’s not unusual for Chapter 13 debtors to need to modify their plans several times during the plan period when something happens to cause missed payments. If there’s a job loss we might wait to see if you’ll be employed again soon. We may ask the court to suspend plan payments until you’re employed again. If new employment isn’t obtained quickly we can ask the court to modify the plan to reduce plan payments. If the decrease in income is permanent or continues for an extended period of time we convert the case to Chapter 7.
