CHAPTER 13 BANKRUPTCY
Chapter 13 bankruptcy has been known by several names including “Reorganization” “Adjustment of Debts” and “Wage Earner Plan”. The concept behind Chapter 13 bankruptcy is that the debtor formulates a plan which takes into account income and subtracts living expenses ultimately leading to a monthly surplus that is paid over to a trustee assigned by the Bankruptcy Court to administer the case. The surplus, or Chapter 13 plan payments are used to pay off administrative expenses and debts that are categorized and prioritized. The dischargeable debts that remain upon completion of the plan are discharged by the bankruptcy court. The term of the plan generally lasts between 36 and 60 months, but may be extended for compelling reasons. A debtor can only use Chapter 13 if he or she has regular income and can formulate a plan that will result in payments to the trustee. Plans can also be formulated to buy time for debtors to sell or refinance their property and use the proceeds and equity to pay off the plan. However, the credit crisis that began to have its effects in 2007 has limited somewhat debtor’s ability to accomplish a refinance of their property.
Chapter 13 bankruptcy is used in situations where a debtor has too much equity in property, and would lose the property in Chapter 7. An example of this is a person who owns a home and has equity that would far exceed the allowable exemptions. Chapter 13 bankruptcy will allow this debtor to keep the property. The reason for this is because the Chapter 7 trustee looks to sell nonexempt property to pay off the creditors, while a Chapter 13 trustee does not look to sell property, but is responsible to administer the Chapter 13 plan.
Chapter 13 bankruptcy is also used in situations where a debtor is behind in mortgage payments and car loan payments, but does not want to lose their home or car. In Chapter 7 people who are behind in loan payments will lose their asset, unless they are capable of redeeming the loan, which in essence is paying the entire loan plus arrearages off. In Chapter 13 a plan can be formalized to show payments of all future mortgage or car loan payments outside the plan, and plan payments can be used to pay back the arrearages over time.
Chapter 13 bankruptcy may also be used if the debtor’s monthly income is great and he or she do not qualify under the Means Test to do Chapter 7 bankruptcy. If a person fails the means test and cannot file a Chapter 7 case, he or she may qualify to file under Chapter 13. The person must still qualify in all other respects to file under Chapter 13. This type of Chapter 13 case is called a “DMI Case”. The plan payments are set by complicated calculations in the Means Test, that ultimately lead to what is called by the Test ‘the person’s disposable monthly income’. In some situations the calculation results in an accurate monthly plan payment, but in other situations it produces an amount that is not practical for the case or the person’s ability to pay. I can help you in this situation determine your eventual plan payment, and advise you on whether it may be practical for you.
Chapter 13 bankruptcy may also be used in situations where people have done a Chapter 7 bankruptcy in less than eight years. In certain situations people may be in financial trouble and otherwise eligible to do the Chapter 7, except for the fact that they have done a previous Chapter 7 within the last eight years. In this situation a Chapter 13 bankruptcy can be done if four years have elapsed since the prior Chapter 7 bankruptcy.
Chapter 13 bankruptcy may also be used to protect cosigners on certain debts. This is considered to be the “co-debtor stay”. In Chapter 7 when an individual lists a debt, the automatic stay is only applicable to the person filing bankruptcy. If the debt is cosigned, the lender will be able to continue collection efforts against the cosigner. This situation usually is a serious one because often codebtors are close family members or friends, who have cosigned a loan in order to enable the debtor to borrow money. Usually the debtor has agreed with the codebtor to have an informal responsibility to pay back the loan. When the debtor is having financial difficulties, he or she does not want to cause financial problems to the codebtor. Chapter 13 bankruptcy will stop all collection efforts against the codebtor, but the debt has to be paid off in full by the conclusion of the Chapter 13 bankruptcy. If the debt is not paid off by then, the automatic stay ends upon completion of the Chapter 13 bankruptcy, and the creditor will be permitted thereafter to reinstitute collection efforts against the codebtor.
Chapter 13 bankruptcy may also be used as a reorganization device to restructure certain debts, particularly income tax and student loan debts, including arrearages. It is possible to create a plan that will designate payments that are more affordable to the debtor, and it may be possible to renegotiate and lower the total amount owed to the creditor, although this is not true in all cases. The one absolute requirement in the situation is that the debt must be paid in full by the end of the Chapter 13 bankruptcy.
Until recently if you were behind in mortgage loan payments Chapter 13 was usually the only practical way of repaying missed mortgage payments and avoiding foreclosure. However, with the recent advent of mortgage modifications, debtors have another way to deal with the missed payments. In rare situations the lender agrees to forgive some or all of the missed payments, but in the majority of situations the lender agrees to add the missed payments to the principal loan amount, and then restructure the payment terms. This has resulted in more people avoiding the necessity of using Chapter 13, and some electing to use a cheaper and simpler Chapter 7 case to deal with their financial problems.