What to expect in a Chapter 13 Bankruptcy.
Chapter 13 Bankruptcy is often referred to as a “wage earner plan” or a “debt repayment plan”.
In Chapter 13 Bankruptcy, the debtor files a “Chapter 13 Plan” with the bankruptcy court agreeing to make the best effort to pay off as much debt as possible over a three to five year period of time. The plan will classify debts in different categories such as secured and unsecured debts. Some debts, such as taxes and secured debts may be paid in full while others may only be paid a portion of the amount owed. In some chapter 13 cases, only secured debt and tax debt is paid and unsecured debt is not paid at all. Upon completion of the chapter 13 plan, the debtor’s obligation to pay most of the debt that is not paid is discharged or wiped out.
The debtor makes a monthly payment to a bankruptcy trustee determined by several factors:
- 1) What secured loans must be paid to retain automobiles and/or other collateral.
- 2) If the loan was made to purchase the auto or other collateral, then the age of the loan is a factor that will effect the amount that has to be paid. If he loan is 910 days old or less, the the loan has to be paid in full plus interest. If it is more than 910 days old, then the value can be paid with interest and the remaining portion is treated like all other unsecured debt.
- 3) What taxes must be paid in full (this depends upon the type of taxes and the age of the tax debt). More on tax debt.
- 4) What are the debtor’s income and expense. In other words, how much can the debtor afford to pay?
- 5) What interest rate must be used on the secured loans (this may vary depending up the status of the secured loan).
In most cases, we are able to reduce the payment to an amount that our clients can afford and our clients can keep their home, autos and other items. In some cases, the liens on certain types of collateral can be avoided, which means that the debtor can keep or retain the collateral without paying the secured loan.
Most unsecured debts remaining at the end of the case are discharged. Some of the exceptions are the remaining portion owed on governmentally insured student loans, child support and alimony, certain debts which were obtained by fraud and a few others will not be discharged in some cases.
What Are The Advantages Of Chapter 13 Bankruptcy?
Chapter 13, in some circumstances, can offer significant advantages over. The main advantages are:
- 1. More debts are dischargeable in Chapter 13 than in Chapter 7;
- 2. Non-dischargeable back taxes and child support can be repaid through the Plan. In many cases the monthly payment required will be substantially less than the creditor, such as the IRS, was requiring prior to the filing of the bankruptcy. Additionally, many priority debts can be paid without additional interest being added after the petition date and penalties on the outstanding tax debt can be discharged as other unsecured debts.
- 3. A debtor can keep property in a Chapter 13 which might be lost to the trustee in Chapter 7 provided the debtor pays enough through his plan to creditors that would have been paid by the sale of that asset in a chapter 7.
- 4. Some secured debts in Chapter 13 are generally reduced to the value of the property involved. This is called cram-down or strip-down. For example, if a debtor owes the bank or finance company $15,000.00 but the car which is the collateral for the loan is worth $11,000, the secured creditor will be paid the $11,000.00 plus interest through the plan, provided the auto loan is not a purchase money loan or if it is a purchase money loan, then the auto was purchased more than two years prior to the filing of the case. In most cases, the interest rate will probably be able to be reduced substantially in the chapter 13 plan.
- 5. A debtor can prevent auto repossessions and home foreclosures, and (in the case of a home foreclosure) repay the delinquency over a period of time. In some cases, a debtor can force a creditor to return an automobile that was repossessed a few days prior to filing the bankruptcy petition.
What Are The Disadvantages Of Chapter 13 Bankruptcy?
While Chapter 13 can offer some real advantages to a debtor, there are significant disadvantages as well:
- 1. Chapter 13 cases now come under greater scrutiny from the court and from the trustee;
- 2. A debtor in a chapter 13 cannot sell any property without court approval.
- 3. A debtor in a chapter 13 cannot borrow any money without the chapter 13 trustee’s or the court’s approval.
- 4. A Chapter 13 case requires a debtor to be “in bankruptcy” for at least three years (in some cases five years), while a Chapter 7 case is normally concluded within four to five months. As a result, the debtor cannot attempt to re-establish his/her credit until the case is closed out.
- 5. Lump-sum distributions such as personal injury and worker’s compensation settlements are considered future income and can be considered in the disposable income test and may have to be turned over to the trustee.