Chapter 13 is my favorite kind of bankruptcy. I know most people file Chapter 7 and I understand why people often prefer to use the quick and easy Chapter 7 over the payments required in a Chapter 13. But if you don’t qualify for a 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 over the alternatives of debt settlement or doing nothing. Secured debt can be restructured and unsecured debt can be discharged at the end of the plan period, all while taking advantage of the automatic stay that prevents continuing debt collection. In fact, there are several reasons why filing Chapter 13 is preferable to a Chapter 7. These include the ability to repay nondischargeable 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; exclude child support income from your required budget; increase protection for co-debtors; reduce the impact on your credit score; and address complex issues like excess equity in a homestead. None of those things can be done in a Chapter 7 so don’t stop considering bankruptcy just because you don’t qualify for a Chapter 7.
Below are some frequently asked questions about Chapter 13.
What happens if I lose my job?
Lots of things can happen over the 3 or 5 years of 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 them to miss payments. But if you lose your job the first thing to do is to call us as soon as possible. Depending on your situation we might wait to see if you’ll be employed again soon. We may be able to 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 your plan payments. If the decrease in income is permanent or continues for an extended period of time you might be able to convert the case to Chapter 7. In any event, it’s important to contact us immediately if there’s a change in employment.
Can I skip my payments during chapter 13?
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.
If I file for Chapter 13 can I later switch to Chapter 7?
If a change in your financial situation is permanent and sufficient to make you qualify for a 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 your debts just as if you had started out in Chapter 7. It may also be possible to add as creditors those that made loans or provided services 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 the Chapter 13 the wiser approach. There will also be additional legal and court fees before a case can be converted to a 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.
Can I sell or buy property while in chapter 13?
Although you need permission from the Court to buy or sell any 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. For instance, 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 is an offer to purchase or loan documents we’ll need copies to attach to the motion. The approval process generally takes 30-45 days so nothing can happen immediately but there are rarely any 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.
How is my plan payment calculated?
In Chapter 13 you repay a portion of your debts over a 3 or 5 year plan period. The length of the plan depends on whether you earn below or above the median income for your 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 you need additional time to cure a mortgage default or repay nondischargeable taxes. Payment plans can’t go beyond five years.
The amount of the monthly plan payment is determined by a simple calculation of how much you have 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 possibly child support results in net monthly income. From that net income all living expenses like costs for food, clothing, transportation, mortgage or rent, etc. 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 is no required percentage of debts to be repaid.
If your income is high enough and your debts low enough to repay all of your debts, you may have a plan payment that is less than your disposable income, creating a savings. You never need to repay more than the amount of your debt plus the trustee’s and attorney fees. If you’re not paying back 100% of your debt through the plan payments you’ll also need to turn over any tax refunds received during the plan period. 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 being discharged means Chapter 13 is far more feasible than most debt management plans that require full repayment of your debt plus interest.