Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, you keep your property, but pay back all or a portion of your debts over a three to five-year period. This is unlike Chapter 7 bankruptcy, where most of your debts are cancelled but you may have to surrender some property to the bankruptcy trustee to pay your creditors. Because you end up paying most of your debts over time in Chapter 13 bankruptcy, it is also called “reorganization bankruptcy.”

This kind of bankruptcy is often used by those who want to save their home, need their car to get to work or are facing a small business bankruptcy or tax debts.

By filing Chapter 13, you keep your property, pay back some of your debts over time and end up with a fresh start. Chapter 13 filers are put on a repayment plan, which describes in detail how much you will pay each of your debts. Each person’s Chapter 13 repayment plan is different.

According to the laws, some of your debts must be repaid in full. The plan also includes payments for things such as your car loan or mortgage, and it can require some payments to debts such as credit cards and medical bills.

Chapter 13 bankruptcy isn’t for everyone. Because Chapter 13 requires you to use your income to repay some or all of your debt, you’ll have to prove to the court that you can afford to meet your payment obligations. If your income is irregular or too low, the court might not allow you to file for Chapter 13. To file Chapter 13, you must be

If your total debt burden is too high, you are also ineligible and Chapter 7 may be the route to take. A “secured debt” is one that gives a creditor the right to take a specific item of property (such as your house or car as collateral repayment) if you don’t pay the debt. An “unsecured debt” (such as a credit card or medical bill as they have no collateral) doesn’t give the creditor this right to “take back” anything.

The Means Test is basically a calculation of your household income over the past six months compared to the median for the state where you live. If the household income for the past six months exceeds the median, your disposable income will be reviewed. If a debtor exceeds the median income, the Chapter 13 plan will be paid over a 5 year or 60 month period.

A Chapter 13 bankruptcy is a 3 to 5 year repayment plan. A person will generally file a Chapter 13 bankruptcy if either:

If you are purchasing a car and want to keep it, the amount owed to the finance company for your car will be included in the payment to the bankruptcy Trustee. If you are leasing a car and you want to keep it, you will make those payments directly to the finance company from whom you are leasing the car. Remember, these expenses are considered in determining your Chapter 13 payment to the Trustee.

As mentioned above, one of the most common reasons someone may file a Chapter 13 bankruptcy is because they are past due on their mortgage payments. A Chapter 13 bankruptcy allows you to pay the arrearage back on your home over the course of your bankruptcy plan. You typically save a lot of money paying the arrears back in the bankruptcy because you will likely pay back the amount past due at 0% interest instead of the high interest rate the mortgage company may be trying to currently charge you.

In a Chapter 13 bankruptcy you would make one payment to the bankruptcy Trustee and they would take that payment and divide it up and pay your regular mortgage and a portion of the amount past due each month so that at the end of your bankruptcy you will be current on your mortgage.

Any changes to your mortgage payments, including increases in payments due to interest rate changes, escrow changes, etc. will be sent to the Chapter 13 Trustee from your mortgage company. As a result, your Chapter 13 plan payments to the Trustee may increase or possibly decrease periodically due to changes in your mortgage. The Chapter 13 Trustee will provide you with notice of the change in your Chapter 13 plan payments prior to the effective date of the change.

If you make your monthly Chapter 13 Trustee payments and all steps are followed, you will likely receive report of completion of plan payments after your designated 3 to 5 year time period. The discharge means that you have repaid most, if not all, of your debts and you are no longer responsible for any outstanding balances. The exceptions are a mortgage, student loans and on-going alimony and child support. You can begin a fresh financial future.

As you can see, Chapter 13 bankruptcy law is complicated and, for most people, often confusing. Contact Turner Law Firm, PLLC for an evaluation so that we may guide you through the bankruptcy process.

It is also important to note that, just like a Chapter 7 bankruptcy, a Chapter 13 bankruptcy will not wipe out certain debts. These include student loans, most taxes, alimony and child support. In most Chapter 13 cases, however, taxes, alimony and child support arrears (or back payments) are repaid over the course of the bankruptcy when the trustee distributes the money to your creditors. Student loans will be reviewed and recommendations will be based on your specific situation, although generally these must be repaid in full.

Also important to know, a Chapter 13 bankruptcy will not change your mortgage payment. Your mortgage payment will stay the same while within the bankruptcy. The only way you can change the mortgage payment is if you get a modification or refinance your mortgage(s). Often times, though, mortgage companies are more likely to work with you in modifying your loans while in a Chapter 13 bankruptcy.

From the instant you file for Chapter 7 or Chapter 13 bankruptcy, the judge issues an “automatic stay.” This is an immediate order to all of your creditors notifying them that you have filed for bankruptcy and that it is illegal for them to make any further attempts to collect on the debt you owe. If your creditors continue to harass you after the automatic stay is issued, you may be able to sue them under the Fair Debt Collections Act (FDCA).

The impact of a bankruptcy on your credit varies for each person’s filing. The most common negative aspect about filing for bankruptcy will be the impact it has on your credit. Your credit score will undoubtedly go down when you file. However, most of our past clients have found that the negative impact on their credit report usually only has an impact for about two years. If you have a house and vehicles and don’t need to get financing for major purchases for a couple of years then the impact on your credit may be relatively unimportant. Turner Law Firm, PLLC regularly has clients who communicate with us on how quickly their credit rebounded after filing the bankruptcy. By building your credit cautiously and avoiding financial mistakes of the past your credit will, in time rebound.