We’ve all experienced it; that heightened sense of anxiety when the time comes to pay the bills and try to make the ends meet. Sometimes, they don’t. Sometimes you have to rob Peter to pay Paul and discover that Peter’s broke. When that happens, a Chapter 13 bankruptcy may be the right answer.
Like a Chapter 7 bankruptcy, a Chapter 13 bankruptcy can eliminate unsecured debts like credit cards but, unlike a Chapter 7 bankruptcy, it can also help you catch up on the mortgage or a car payment.
Called a “wage earner plan”, an individual filing a Chapter 13 bankruptcy proposes a monthly payment to be paid to the trustee from which the trustee would pay the individual’s debts. In some cases, the payment could be used to bring a mortgage or car note current and, in other cases, the payment may be used to pay unsecured debts, like medical bills. A Chapter 13 bankruptcy does NOT require an individual to repay his creditors in full. The amount of the monthly payment is based on an individual’s assets, debts, monthly income and expenses.
Unlike a Chapter 7 bankruptcy, Chapter 13 affords individuals the opportunity to reduce the interest rate on some debts and even reduce the principal amount owed on other debts. If you’ve owned your car for more than 910 days prior to the date that you file bankruptcy and you still owe more on the car than it is worth, you can reduce or “cram down” the amount that you owe to the fair market value of the car. Likewise and even if you haven’t owned your car for more than 910 days, you may be able to reduce the interest paid on the remaining balance of your car loan.
Another significant advantage of a Chapter 13 bankruptcy is the possibility of “lien stripping.” If the fair market value of your home is less than the total amount owed on the first mortgage, you can eliminate the security interest of junior lienholders and treat them as unsecured debts in your bankruptcy.
Like a Chapter 7 bankruptcy, a Chapter 13 bankruptcy provides individuals the relief of the automatic stay. The automatic stay is essentially a Bankruptcy Court Order that stops the calls, the letters, the lawsuits, the garnishments, the repossessions and the foreclosures. It gives the individual a bit of breathing room to gather their thoughts and put a plan in place to get back on track.
There are several reasons that an individual would file a Chapter 13 bankruptcy as opposed to a Chapter 7 bankruptcy. The most common reason, as noted above, is to “catch up” a delinquent mortgage or car loan.
One common scenario over the last several years has involved individuals attempting to modify their home loans through one or the other of varying government programs. Despite the valiant efforts of homeowners to provide their lenders with the copious documentation required for modification, they discover all too late that the documents were not received and their house is scheduled for foreclosure. Chapter 13 bankruptcy is an effective tool that not only brings the foreclosure to a halt but allows an individual to resolve any delinquency over a 3-5 year plan.
Another reason that some individuals file a Chapter 13 bankruptcy as opposed to a Chapter 7 bankruptcy is because they own assets which they wish to keep. Bankruptcy provides exemptions which permit individuals to retain assets up to a certain dollar value depending on the state in which you file. If an individual owns an asset which exceeds the allowed exemption in their state, that asset could be liquidated in a Chapter 7 bankruptcy to pay creditors. In order to retain that asset, the individual would need to file a Chapter 13 and agree to pay creditors in their bankruptcy plan at least as much as the creditors would receive if the asset were liquidated.
For example, if you owned a home free and clear without a mortgage and the home was worth $50,000, the bankruptcy exemption for a homestead in Georgia would only exempt $21,500 of the value. In a Chapter 7 bankruptcy, the Trustee would be required to sell the property, give you your $21,500 exemption and pay the balance to your creditors. In order to keep your home, an individual could file a Chapter 13 bankruptcy and propose to pay his creditors the $28,500 that they would otherwise have received from liquidation of the property over a three to five year plan.
As a consequence of changes to the bankruptcy law in 2005, some individuals may be required to file a Chapter 13 if their income exceeds the median for their location according to the IRS. The Means Test calculates an individual’s monthly disposable income based on various expenses determined by the IRS and some actual monthly secured debt payments. Due to the complexity and importance of the Means Test, it is important that you work with a competent bankruptcy attorney to insure success in your Chapter 13 plan.