A Chapter 13 bankruptcy case is primarily used to repay all or some of an individual’s debts. It is also known as a debt adjustment case, or a “wage earner’s plan.” Chapter 13 can stop a foreclosure or repossession and allow the individual time to make payments over three to five years, often even over the objection of a creditor.
A debtor who is behind on a mortgage or car loan is able to catch up in a Chapter 13 bankruptcy. Through Chapter 13, the debtor may restructure debts and sometimes change loan terms, such as the interest rate and the time for repayment. Some upside-down vehicle loans can be “crammed down,” meaning the obligation is reduced to the value of the vehicle and then paid over three to five years. Second or third mortgage debts can also be stripped off, if the amount of the first mortgage is equal to or more than the value of the home.
Chapter 13 differentiates between three types of debts: first, priority debts, including most taxes and child support, must be paid in full. Second, secured debts, debts secured by collateral, must be paid with interest over the life of the plan, or surrendered back to the creditor. Finally, unsecured debts, like credit cards and medical bills, are paid in accordance with the debtor’s financial ability. This may be as much as 100% or as little as 0%.
The main feature of a Chapter 13 bankruptcy is the repayment plan, which must be approved by the bankruptcy court. A Chapter 13 plan will propose a monthly payment to pay all or some creditors over three to five years. Once the bankruptcy court approves a Chapter 13 plan (called “confirmed” in bankruptcy lingo), the court will direct the bankruptcy trustee to pay creditors (and keep a percentage as a fee) in accordance with the confirmed plan.
There are monetary limits on the amount of unsecured and secured debts in a Chapter 13, currently set at $383,175 in unsecured debts and $1,149,525 in secured debts. Debtors who exceed these limits are not eligible for Chapter 13 relief and should consider a Chapter 11 reorganization bankruptcy.
The Bankruptcy Code does not allow joint debtors to double the Chapter 13 debt limits. Most courts apply the plain meaning of the statute and disqualify couples who exceed the debt limits. A minority of courts will look at the individual debtor’s debts to determine whether the individual falls under the debt limits. In these courts if both debtors are individually under the debt limits, the joint case is allowed to proceed. In those cases, if only one debtor qualifies and the other debtor does not, the qualifying debtor may continue with her Chapter 13 case, while the nonqualifying debtor must convert to another chapter.
If a claim is “underwater,” such as a junior mortgage, it is classified as unsecured for purposes of the Section 109(e) so long as it is not supported by any part of the collateral’s value. This is the case even when the creditor’s lien has not been avoided as of the petition date, and even if the loan is not avoidable at all. Similarly, most courts will bifurcate a debt into secured and unsecured portions when analyzing the debt limits of Section 109(e).
When pushing Chapter 13 debt limits in a joint case, the debtors should consider: (1) filing separate cases for married couples (and consider filing a Chapter 7 for one spouse and a Chapter 13 for the other); and (2) using Chapter 20. Your attorney can help you decide the best strategy to maximize your bankruptcy benefits.