Individuals with regular income and/or significant assets can keep all their property and control their overwhelming debt by repaying only a portion of it.
Chapter 13 Bankruptcy
The chapter of the Bankruptcy Code providing for adjustment of debts of an individual with regular income. (Chapter 13 allows a debtor to keep property and pay debts over time–three to five years.)
What Is Chapter 13?
Sometimes called a “wage earners” bankruptcy, chapter 13 bankruptcy is a way for debtors with regular income to reorganize their finances. In Chapter 13 bankruptcy, you’ll work with your creditors and the Bankruptcy Trustee to create a payment plan lasting between 3 to 5 years. At the end of the plan, your remaining unsecured debts will be discharged. Most filers end up paying pennies on the dollar for their unsecured debts.
Chapter 13 bankruptcy addresses both secured and unsecured debts. You may choose whether you want to continue making payments on your secured debts, such as mortgage and auto loans, or surrender the property. The unpaid portion of your unsecured debts, such as credit cards and medical bills, will be discharged at the end of your plan.
Advantages of Chapter 13
Chapter 13 offers individuals a number of advantages over liquidation under chapter 7. Perhaps most significantly, chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the chapter 13 plan in a timely manner.
Another advantage of chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers. Finally, chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 protection.
How much will I have to pay each month?
Your Chapter 13 plan payment depends on what you earn, not what you owe. The Trustee will take your income and subtract certain expenses according to local and national standards. Then they will subtract certain expenses such as a mortgage payments, child and spousal support payments, tax debts, and auto loan payments. You’ll continue to make these required payments throughout your plan. After you’ve subtracted your allowable monthly expenses and required payments, you’re left with your “disposable income.” That’s what you’ll have to contribute to your Chapter 13 plan each month. You’ll make payments to the Bankruptcy Trustee and they will distribute them among your creditors.
Chapter 13 Eligibility
Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual’s unsecured debts are less than $250,000 and secured debts are less than $750,000. 11 U.S.C. § 109(e). These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor.
An individual must, within 180 days before filing, have received credit counseling from an approved credit counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111. There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling.
What debts aren’t discharged in Chapter 13 bankruptcy?
As a general rule, the discharge releases the debtor from all debts provided for by the plan or disallowed, with the exception of certain debts referenced in 11 U.S.C. § 1328. The discharge in a chapter 13 case is somewhat broader than in a chapter 7 case. Debts dischargeable in a chapter 13, but not in chapter 7, include debts for willful and malicious injury to property (as opposed to a person), debts incurred to pay nondischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings. 11 U.S.C. § 1328(a).
Certain types of debts are nondischargeable in bankruptcy. Debts not discharged in chapter 13 include certain long term obligations (such as a home mortgage), debts for alimony or child support, certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine included in a sentence on the debtor’s conviction of a crime. To the extent that they are not fully paid under the chapter 13 plan, the debtor will still be responsible for these debts after the bankruptcy case has concluded. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for restitution or damages awarded in a civil case for willful or malicious actions by the debtor that cause personal injury or death to a person will be discharged unless a creditor timely files and prevails in an action to have such debts declared nondischargeable. 11 U.S.C. §§ 1328, 523(c); Fed. R. Bankr. P. 4007(c).
What about repossession, foreclosure, and collections?
Filing the petition under chapter 13 “automatically stays” (stops) most collection actions against the debtor or the debtor’s property. 11 U.S.C. § 362. Filing the petition does not, however, stay certain types of actions listed under 11 U.S.C. § 362(b), and the stay may be effective only for a short time in some situations. The stay arises by operation of law and requires no judicial action. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even make telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.
Chapter 13 also contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a “consumer debt” from any individual who is liable along with the debtor. 11 U.S.C. § 1301(a). Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose. 11 U.S.C. § 101(8).
Individuals may use a chapter 13 proceeding to save their home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as the individual files the chapter 13 petition. The individual may then bring the past-due payments current over a reasonable period of time. Nevertheless, the debtor may still lose the home if the mortgage company completes the foreclosure sale under state law before the debtor files the petition. 11 U.S.C. § 1322(c). The debtor may also lose the home if he or she fails to make the regular mortgage payments that come due after the chapter 13 filing.
Is Chapter 13 bankrkuptcy right for me?
If you’re struggling with debts but you have a steady income, Chapter 13 bankruptcy may be a good option for you.
The Chapter 13 process is complicated and difficult to navigate. Your payment plan must conform to specific rules and regulations and your creditors will fight every step of the way to get you to pay more. GSL Immigration Law will make sure you get a fair plan that fits all of the requirements and leads to a discharge. We will help you decide how best to protect your most important assets and will stand up to creditors who threaten your rights.
Take the first step in putting your stressful debt in the past and call (408) 982-3036 today to set up a free chapter 13 bankruptcy consultation.