The chief distinguishing characteristic of a Chapter 13 bankruptcy is its repayment plan. Unlike a Chapter 7 bankruptcy case, the Chapter 13 debtor submits a proposal to the court to repay creditors over three to five years. There is no repayment plan in a Chapter 7 bankruptcy case. Because of the repayment plan, Chapter 13 cases are generally more complicated than Chapter 7 bankruptcies, but the debtor’s relief can be more powerful. With this in mind, here are the top five questions clients ask when considering Chapter 13 bankruptcy:
Will I lose any property?
No. The Chapter 13 trustee will not take property from you. The law allows you to keep and “exempt” a certain amount of property during your bankruptcy case. If you have property in excess of the legal exemption amounts, you are required to pay unsecured creditors an amount equal to the non-exempt equity during your repayment period.
How can I keep my car if I owe more than its worth?
If your vehicle loan was made more than 2-1/2 years before your bankruptcy is filed, you can “cram down” your loan to the fair market value of the vehicle. For instance, if you owe $15,000, but your car is only worth $9,000, the bankruptcy court will separate the debt into a secured amount of $9,000, and an unsecured debt in the amount of $6,000. You must pay the secured debt in order to keep your vehicle, but the remaining unsecured debt will be paid at the same rate as other unsecured creditors (like credit cards and medical bills). Usually this payment is nothing or a few cents on the dollar. At the end of the case most unsecured debts are discharged.
My house is in foreclosure. Can I keep it?
If you are behind on mortgage payments, a Chapter 13 bankruptcy will allow you to “catch up” the arrears over three to five years. Additionally, while you are not able to “cram down” a mortgage on your home, if you have a junior (second or third mortgage, or tax or judgment lien) that is entirely unsecured, Chapter 13 may afford a significant benefit. The bankruptcy judge can strip off the lien and the junior debt becomes an unsecured debt, payable at the same rate as other unsecured creditors.
How much is my monthly payment?
Your monthly payment will largely depend on your ability to pay your creditors. The bankruptcy law requires that you pay priority creditors first. Priority creditors include domestic support obligations and most taxes. Any secured property you want to keep is paid next. Finally, any “extra” income (called “disposable” income) must be paid to unsecured creditors.
What if my income changes during the repayment period?
Immediately report any changes in income to your attorney. If there is a substantial increase, your monthly payments will likely increase. Similarly, if your income is reduced, your monthly payment may decrease. If you are unable to complete your plan because of a reduction in income, you may qualify for early discharge, or your plan can be modified.
Chapter 13 is a very flexible legal tool for restructuring personal finances. Your attorney can explain how the federal bankruptcy code can provide relief from overwhelming debt and help you on your way to a bright financial future.