Chapter 13 Bankruptcy
Chapter 13 is a “debt reorganization” Bankruptcy in which filers have a single monthly payment to the Chapter 13 Trustee over a period of 36-60 months (though we try to finish most Chapter 13’s in about a year if we can with an early payoff) to deal with their debts. There are a lot of different things that can be accomplished in a Chapter 13.
The different types are laid out below. It can be an avenue for low income earners to save their house from foreclosure. It can also be an avenue for high income earners (even as much as $200K+ annually or more) to put in place a workable monthly payment that will resolve their debts in a fixed amount of time. As opposed to a lot of people’s realities, in which they pay a ton of money each month to the credit cards/loans and the balances never seem to move in.
Here are the most common types of Chapter 13 Bankruptcies:
- An income based Chapter 13: These cases are Chapter 13’s because the income was too high to qualify for a Chapter 7 and the monthly Chapter 13 Plan payment goes almost exclusively towards unsecured debts. The monthly Chapter 13 Plan payment amount is always much less than the monthly payment amounts people were paying to service their debt without reducing it. A Chapter 13 is not paying back all of the debt. It is just paying the lowest monthly amount that the Debtor can qualify for based on their specific facts. Over 20 years, my experience has been that if someone was paying $2500/mo. towards their unsecured debt (while making no progress doing that) we can usually get them to a $500/mo. solution. Our plan payments have varied from $50 per month to upwards of $3,000 per month; 13’s are very fact specific.
- Stop the foreclosure/save the house Chapter 13: A Bankruptcy filed up to the second before the foreclosure will stop a foreclosure and then the filer uses the monthly Plan payment to catch up on the mortgage arrearage (what they’re behind) over that 36-60 months, while also paying regular monthly mortgage payments moving forward. This type of case would also resolve all the unsecured debts also (most often without paying anything towards them). This is the most common type of Chapter 13 we have seen over the years.
- Secured Debt Resolution Chapter 13: There are a variety of things that can be accomplished under Chapter 13 pending the specific facts. You can “cramdown” car loans to their fair market value and a reasonable interest rate. You can strip second/third mortgages or liens off your home if the home value is lower than the first mortgage. (That’s not at all a common fact at this moment in time for obvious reasons, but if/when the housing market normalizes, these may become very popular. In the years following the 2008 collapse, we stripped a number of second mortgages for people including some near and above $100K.) You can cure a fully matured mortgage. You can also propose to modify secured loans in a variety of ways pending the specific circumstances in a Chapter 13 Bankruptcy.
- Too much stuff Chapter 13: This is for the person with the $35K car that they own outright that I can only protect $22K of with available Bankruptcy exemptions. They don’t want to file Chapter 7 and have the Trustee sell their Corvette (even though the Trustee would give them a $22K check). So, this person files a 13 to pay about $10K-$13K to the creditors (the amount we couldn’t protect) to keep the Corvette. You are in complete control of your assets in a Chapter 13 and can dismiss your case at any time if you so choose.
- IRS issues Chapter 13: These cases pay recent IRS debt through the Plan while wiping out older IRS debts and other unsecured debts. Often we see people making a monthly payment to the IRS of, let’s say $500/mo. for the long term to resolve that liability. We can frequently put those people into a Chapter 13 with a lower monthly payment to pay only recent IRS debt, while wiping out both older IRS debt and all unsecured debts. Sometimes it’s best to deal with the IRS outside of a Bankruptcy, but if there are significant other debts in play we can usually achieve a lower monthly Chapter 13 Plan payment than the monthly IRS payment pending the facts. Chapter 13 also discharges things a Chapter cannot discharge such as a marital property settlement.
We provide a free hour long consultation at which we will explore all Bankruptcy options as well as the alternatives. The goal is for you to walk out the door with a lot less stress and the ability to make an informed decision on the best course of action to resolve your debts.