Chapter 13 Bankruptcy
CHAPTER 13 DEBT REPAYMENT PLAN
Chapter 13 allows individuals and sole-proprietor businesses to repay debt over a period of time not more than five years. The Court restrains collection action by creditors as long as you are able to make the payments call for under the plan. Creditors are entitled to file claims for the amount they believe you owe as of the date the Chapter 13 petition is filed with the Court, and those claims can be disputed. Most unsecured creditors will be paid without further interest. Secured creditors receive interest.
This type of case is considered to be a good option for people who make too much money to qualify for a Chapter 7 case. With the recent real estate market crash, Chapter 13 cases have also become popular because many clients are able to wipe out their second mortgage in this type of case.
To qualify for a Chapter 13, the total of your secured debts must be less than $1,081,400 and the total of your unsecured debts must be less than $360,475. If your debts exceed either of these limits, any bankruptcy reorganization must be under Chapter 11. (*We do not handle Chapter 11 cases at this time.) Also, you must have some measurable disposable income so that you can afford to make a monthly payment to the trustee.
Treatment of Secured Debts
A Chapter 13 is particularly useful to stop repossessions and foreclosures when there is a substantial delinquency on real estate and vehicle loans and leases. Vehicle loans can be paid through the plan without the necessity of catching up on delinquent payments. Mortgage arrearages can be paid back while the ongoing mortgage payments are resumed, which gives homeowners up to 5 years to get caught up on their mortgage. Lease arrears can be included in the plan, with the ongoing payments kept current outside the plan. If necessary, a Chapter 13 plan can be used to buy time to sell a house or other property with equity. As long as the plan payments are made, you can keep and use the collateral securing the debt.
Stripping Off Second Mortgages
Chapter 13 cases are particularly popular right now for families who have a second mortgage because Chapter 13 cases permit many second mortgages to be wiped out entirely. In order to get your second mortgage wiped out, you must be able to prove that your house is worth less than what you owe on your first mortgage, making your second mortgage wholly unsecured. If there is some equity behind your second mortgage, then you cannot wipe it out. The valuation of real estate can be very important in determining if this is possible for you.
Do I Have To Give Up Any of My Property?
Because you are paying your debt, the Court is not interested in taking your non-exempt property as in a Chapter 7. If you can afford to pay your debt in a Chapter 13, you can protect non-exempt property, which you may otherwise lose in a Chapter 7. For families that own a lot of assets, a Chapter 13 case may be a good option for this reason.
Do I Have To Pay Back All My Debt In Chapter 13?
Not necessarily. Chapter 13 plans are based on your personal budget, and your ability to pay. If you cannot afford to pay all of your debt over a five year period or less, you may be entitled to pay less than 100 cents on the dollar to non-priority unsecured creditors.
Secured creditors must be paid 100% of the value of their collateral or the amount you owe, whichever is less, if you wish to keep the collateral securing the debt. Priority taxes, child and spousal support arrears and other special priority debts must be paid 100%. Unsecured creditors must be paid as much as they would have received if you filed Chapter 7 where there is non-exempt property, preferences or fraudulent transfers that would generate funds to pay them.
Many clients even pay 0% to their unsecured creditors (i.e. credit cards) and just get current on their mortgage through a Chapter 13 case. Whatever amount that does not get paid through the plan to unsecured creditors gets discharged much like in a Chapter 7 case. Determining your plan payment amount can be very complicated, and hiring an experienced Chapter 13 attorney is paramount to the success of your case.
The Chapter 13 Trustee collects the plan payments, distributes the funds to your creditors and provides record keeping and monitoring functions for the Court. The Trustee is paid a fee based on a percentage of all amounts paid into your plan. The percentage is adjusted periodically and cannot exceed 10%. Our plan calculations before we file assume a 10% administrative fee.