A Chapter 13 bankruptcy is the reorganization chapter in the Bankruptcy Code, which allows individuals to catch up on debts they owe creditors by paying under a “reorganization plan” approved by the Bankruptcy Court. Individuals often file a Chapter 13 bankruptcy because they are not eligible for a Chapter 7 bankruptcy.
A Chapter 13 bankruptcy is designed to allow individuals to retain their property (real estate, cars, etc.) and pay back some, or all, of their debts over a 3 to 5 year period. Under the Bankruptcy Code, the amount of time permitted to pay back debt is determined by the amount of the debtor’s income. As part of initiating a Chapter 13 bankruptcy, a reorganization plan is filed. This reorganization plans lists the proposed manner in which debts will be paid back. For example, a debtor may include a proposal in a reorganization plan to cure all “arrearages” (owed payments) on a mortgage, car loan, tax, or domestic support obligation such as alimony and child support. In addition to paying back debt owed, a Chapter 13 bankruptcy has other benefits such as a “cramdown” (reducing the principal balance on a car loan to the value of the car, or reducing the balance of a mortgage secured against rental property to its value) and “lien stripping” (removing a junior lien from your house).
Once a reorganization plan is filed, your creditors and a Chapter 13 trustee assigned to your case will examine the plan and either consent or object to your proposal. If no objections are made, or objections are resolved, the Bankruptcy Court will approve your reorganization plan, and usually you must make monthly plan payments to a Chapter 13 trustee. The trustee will be in charge of monitoring your periodic payments to creditors. Most of the time, you will be responsible for continuing to pay your ongoing monthly mortgage payments, while the trustee will use your plan payments to pay off the arrearages owed on the mortgage.
Who is eligible to file a Chapter 13 bankruptcy?
In order to file a Chapter 13 bankruptcy, you must be an individual – not a corporation. Additionally, you must have enough “regular” income from your salary or rental income to show that you can afford to make your plan payments. If you do not have enough regular income to qualify for a Chapter 13 bankruptcy, you may qualify for a Chapter 7 bankruptcy.
However, even if you are an individual with enough regular income to make plan payments, you may still be ineligible to file if your debt is too high. The Bankruptcy Code imposes debt limits. Currently, you are limited to $1,149,525.00 of secured debt and $383,175.00 of unsecured debt to be eligible to file a Chapter 13 bankruptcy.
To determine if your are eligible to file a Chapter 13 bankruptcy, please contact us now, or call us at (844) KATZ-LAW.
What happens to my debts in a Chapter 13 bankruptcy?
Debts in Chapter 13 bankruptcy cases are normally “classified” by their priority. Priority debts such as back child support, certain taxes, and alimony must be paid in full through the reorganization plan.
As debt “secured” property, such as a mortgage or car loan, you must propose to cure any defaults on the debt to keep your property. For example, if you wish to keep your home, you must cure all mortgage arrearages in full through the reorganization plan, and you must keep current on all ongoing monthly mortgage payments – you cannot just stop making your ongoing monthly payments. As for cars, usually, you must pay off your car loans in full through the reorganization plan. If you do not wish to retain your property, however, you may choose to “surrender” it, and you will not be required to make any further payments (for example, you will no longer have to make HOA payments if you surrender your condominium).
Unsecured debts such as credit cards and medical bills usually fall under “non-priority unsecured debt,” and you are often not required to paid those in full. These debts are lumped together and classified as one “class” in your reorganization plan. A certain percentage of these unsecured claims are paid through the plan. The percentage depends on your disposable income remaining after paying your priority and secured debts (described above) and can range from 0% to 100%. Most Chapter 13 debtors end up paying only a small percentage of what is owed to their non-priority unsecured creditors.
How will a Chapter 13 bankruptcy affect my credit?
A Chapter 13 bankruptcy will remain on your credit for up to 10 years after your filing date. However, a Chapter 13 bankruptcy may be removed from your credit report in less than 10 years. Keep in mind that the clock starts running when you file your case, not when you receive your discharge. Since most Chapter 13 bankruptcies last 3 to 5 years, chances are your Chapter 13 bankruptcy will only appear on your credit report for several years after completing it.
Creditors who review your credit report may look at you in a better light if you file a Chapter 13 bankruptcy as opposed to a Chapter 7 bankruptcy; the reason being is that such creditors will see that you attempted to reorganize your debts as opposed to liquidating all of your assets and receiving a discharge.
Why should I retain an attorney to help me file a Chapter 13 bankruptcy?
A Chapter 13 bankruptcy can be much more complex than a Chapter 7 bankruptcy. In fact, it is estimated that more than 90% of Chapter 13 bankruptcies filed by individuals who did not retain an attorney fail. A Chapter 13 attorney can help you navigate through the Chapter 13 process.