Chapter 13 Bankruptcy
Chapter 13 is ideal for people who want to save their home from foreclosure, lower a car payment, consolidate debts or save other valuable assets when Chapter 7 won’t allow them to accomplish their financial goals.
You may not be sure whether you need a Chapter 13 bankruptcy attorney or a lawyer that will handle your Chapter 7 case. That’s okay because at the firm of Eugene J. Malady, LLC we are experts at handling both types of cases for people that need debt relief.
While a Chapter 7 case is usually resolved and completed within a few months, Chapter 13 is designed for people that need to propose a longer term “Plan” to save their property or pay back debts over time—usually 3 to 5 years.
Often referred to as a “reorganization” or a “wage earner plan”, a Chapter 13 case allows a debtor to resolve many types of financial problems. For example, Chapter 13 is ideal for people who want to save their home from foreclosure, lower a car payment, consolidate debts or save other valuable assets when Chapter 7 won’t allow them to accomplish their financial goals. Chapter 13 is also used by people that don’t qualify for Chapter 7 because of the “Means Test” (their income is too high).
Sometimes Chapter 13 is used by people that have assets that are “non-exempt” (can’t be protected with available exemptions), so they propose a Plan that will pay their creditors the same as they would have received in a Chapter 7 case—and thus they get to keep their property. Chapter 13 also is useful to people that have unpaid tax debts, student loans, delinquent spousal support or equalization payments from a divorce when these types of debts cannot be discharged or eliminated in Chapter 7.
Who can file a chapter 13 petition?
Under the Bankruptcy Code, Chapter 13 is referred to as an “Adjustment Of Debts Of An Individual With Regular Income.” So from the title you can see that a Chapter 13 petition may only be filed by an individual (or a married couple), not a corporation or a partnership.
The chapter 13 plan
The essence of Chapter 13 is the “Plan” that your bankruptcy attorney prepares, in consultation with you, and that is filed with the Bankruptcy Court when you file your petition. Everyone who files Chapter 13 must file a Plan with the Court. The Bankruptcy Court must formally approve your Plan before it is effective, and this Court process is called “confirmation of the plan.” You should expect that your Plan will require payments over 3 to 5 years depending upon your income and other factors.
Plans in Chapter 13 may also be used to restructure your debts in some very useful ways. First, it will help you to know that it is common for Chapter 13 Plans to propose lower than a 100% pay out to unsecured creditors, often because most of the typical debtor’s excess income is used to cure a default on a home mortgage or some other secured debts or “priority debts” like taxes. So unsecured creditors often receive a very low or even a zero pay out in Chapter 13.
And a Chapter 13 Plan may also be used to “strip” certain liens. For example you may be able to restructure a secured debt if your property (like a car or investment real estate) is underwater—where you owe more on the debt than the property is worth. To accomplish this, we “split” the debt into a “secured portion” (based on the value of the collateral) and an “unsecured portion” (the part that exceeds the collateral value) and we effectively reduce the amount of the lien against your property. When this happens, the “unsecured portion” will be dumped into the category of unsecured claims and will receive pro rata payment with other unsecured creditors (often a very low percentage or even zero).
Common issues solved by a chapter 13 plan
Most debts are “discharged” when you complete all payments due under your Plan, with the exception of most student loans. Of course your Plan can most likely lower your payments on your student loans during the Plan term and any other amounts due are deferred during the term of the Plan. So this is a powerful tool to at least get temporary relief from overwhelming student loan payments.
What if your home is in foreclosure? Your Chapter 13 Plan can be used to save your home. Your Plan can take the past due payments (the defaulted amount) and put them into the Plan to be paid back over the term of the Plan at zero interest. Of course the Chapter 13 case stops the foreclosure at the time you file your petition, and if you stay current on the payments that come due after that, and you make your Plan payments, you will save your property!
What if you have income tax issues? If you need your Plan to deal with income tax issues, then you should know that your Plan may completely discharge your tax debts that are more than 3 years old (subject to a few other requirements); and unpaid taxes that are more recent may be repaid with zero interest. This usually results in a much lower payment than you might get through the process of an Offer in Compromise with the IRS.
What if your monthly payments or interest rates are too high? Chapter 13 may also be used to lower interest and payments on a car loan and may even stretch out the term of your existing automobile loan. In other words, your Plan may be used to make your auto loan more affordable and also allows you to put defaulted payments into the Plan to be cured over time. Another important feature of Chapter 13 related to auto loans is that you may “cram down” or lower the auto loan amount if your car loan is more than 910 days old. A “cram down” occurs when the loan amount exceeds the value of the car and your Plan proposes to “lower” the loan amount to be equal to the value (with any “unsecured portion” dumped into the category of other general unsecured loans). The lowered loan balance then becomes the secured loan that is paid through your Plan.
Filing a Chapter 13 bankruptcy case requires special knowledge and expertise. Some of our lawyers have a deep understanding of and experience with Chapter 13 that goes back for decades. We are experts and we will guide you through the Chapter 13 process if that is the best option for your financial situation.
Call me today at (610) 565-5000 to schedule a free consultation.