Chapter 13 Bankruptcy
Chapter 13 at a glance:
Some typical benefits of Chapter 13 relief in most cases are as follows:
- You can retain your home or car in foreclosure/repossession
- Temporarily suspends a foreclosure action against your home
- You can make up any arrearage on your home or car over time (36-60 months)
- You may be able to eliminate or reduce a second mortgage
- You may be able to reschedule your secure debts and lower their payments, such as reducing your current payment on a vehicle
- You can protect any co-signer on your secured debts from any liability during the bankruptcy plan
- You can pay all or part of you attorney fee through the plan instead of all up front
- If you qualify for a 0% plan, all your unsecured debts are erased
- You may be able to substantial reduce the amount of unsecured debt you have to repay if you don’t qualify for a 0% plan.
- Civil lawsuits or judgments against you are stopped and/or dismissed
- Stops all wage garnishments and bank account attachments
- Stops creditors from continuing to make harassing calls about your debts
- You can repay student loans and/or tax debts via the 13 plan
- You can even discharge reinstatement fees assessed by the BMV
Chapter 13 Drawbacks
- If you fail to make payments to your 13 plan, secured creditors can continue with a foreclosure or repossession of your property after requesting and receiving permission or “relief of stay” from the bankruptcy court
- The bankruptcy remains on your credit report for 10 years
- You cannot discharge most student loans, income tax liens, child support arrearage or alimony obligations
- You can only receive a Chapter 13 discharge once every 4 years
- You may have to pay something to unsecured creditors if you have non-exempt equity in property or have income above the median standard
- You may have to give up all or part of your tax refund(s)
- You may not use credit cards or incur any non-emergency debt of more than $1000 while in Chapter 13
- You may not purchase anything on credit without obtaining written permission for the Chapter 13 Trustee
- You may not dispose of any substantial property without written permission from the Chapter 13 Trustee
- In most cases, your Chapter 13 payment will be automatically taken from your wages and paid to the Trustee through your employer
Chapter 13 Basics:
Chapter 13 is known as the “wage earner plan” and is the second most common bankruptcy to file. In a Chapter 13 plan, the debtor is repaying all or part of their debts over installments lasting three to five years. People generally will look to Chapter 13 when they have a steady income, but are not eligible for Chapter 7 for various reasons. Typically, Chapter 13 clients are either facing foreclosure, or have filed Chapter 7 in the recent past, or they have large amounts of equity in specific property and they want to retain that specific property.
The basic idea behind Chapter 13 is to develop an installment plan that will allow the debtor to retain their property while repaying their creditors according to debtor’s available disposable income. A debtor’s disposable income (or what a debtor has to pay to secured and unsecured creditors) is determined through calculations of the debtor’s income and deductions via the “Means Test”. (See a simple explanation of the Means Test under Chapter 7 Bankruptcy Basics. However, the Chapter 13 Means Test is a little more complex than the Chapter 7 test because there are more deductions permitted under the Chapter test).
For any secured property the debtor wishes to retain, the Chapter 13 plan will account for those payments, both currently due as well as any arrearage. For any secured property the debtor does not wish to retain, the debtor will have to surrender that property back to the creditor and the debt will be converted to an unsecured debt. Unsecured debts are typically accounted for in a Chapter 13 plan when the debtor has available disposable income as indicated on the Chapter 13 Means Test.
If a debtor’s Chapter 13 plan is a 0% plan, then your unsecured debts are wiped out and are not repaid to creditors. If the debtor’s plan is anything above a 0% plan, then your unsecured creditors will be paid your plan’s percentage on each unsecured creditor’s claim or debts. All creditors will have to file “claim” in order to receive any payment. A claim is a bankruptcy form sent out to your creditors that they in turn complete and submit back to the court and it is used as a means for verification of your debts.
Once you have filed your petition and plan, you will be assigned a Judge and Trustee, as well as receive your 341 hearing date, which will be held 30-45 days from the date your petition was filed. The 341 hearing is a meeting for the creditors and the trustee to ask you questions about your petition and plan, as well as assets and liabilities. You are under oath when you are attending this hearing. A typical hearing lasts 10 minutes. The 341 hearing should be the only hearing you have to attend if your petition and plan have been properly prepared and filed. If there are any corrections or amendments to your plan, the 341 hearing is when they would be addressed.
Thereafter, your plan needs to be “confirmed” or approved before it can go into effect. If your plan has not been objected to by the Trustee or any interested party within a certain time period, your plan will automatically approved and there will not be another hearing required. Once approved, you will have to continue with making the plan payments in order to successfully complete the plan and receive a bankruptcy discharge order. Without the order, you may still have liability for the debts listed in your petition.
In some Chapter 13 Plans, the Trustee will require you to turn over your non-exempt federal and state refunds during the life of your plan. Those with larger refunds on average (I would say $3000 or more in general) are prone to have the Trustee request your refunds. Typically, if you are required to turn over those refunds, this additional money will be considered as extra contribution toward your unsecured creditors and not credited as extra regular scheduled payments. In other words, a windfall to your unsecured creditors, as they will receive more money and you will not be reducing the length of time in your plan. However, as with most things, there are ways to avoid surrendering the refunds if you happen to fall into this category.
Upon discharge, you will receive an "order" so deeming that you have completed your plan payments and that your debts have been discharged and/or paid in accordance to the provisions in the Chapter 13 plan. Your creditors are forbidden to demand collection from you for discharged debts. |