Chapter 13 bankruptcy is normally used to catch up on past due mortgage payments, car payments, or taxes. Chapter 13 does everything a Chapter 7 does but has some additional benefits.
How It Works
In Chapter 13 Bankruptcy, in addition to the bankruptcy petition, statements, and schedules, the individual files a “Chapter 13 Plan” with the bankruptcy court agreeing to make the best effort to pay off as much debt as affordable over a three to five year period of time. The Plan will classify debts in different categories such as secured and unsecured debts. Some debts, such as taxes and secured debts may be paid in full while others may only be paid a portion of the amount owed. In many cases, unsecured creditors do not receive any payment. Understanding who gets paid and how much in a Chapter 13 Plan can be confusing because every person’s case is a little different and one small detail about a certain type of debt can make a big difference in how it’s treated in the Chapter 13 Plan.
After the bankruptcy documents are filed with the court, the individual will begin to make a monthly payment to a bankruptcy trustee. The monthly payment is determined in a number of ways. There is both a floor and a ceiling to the payment amount. The floor is determined by simply adding together all the things that the individual wants in the Plan to what is required to go in the Plan (mortgage arrearage, property taxes, auto loans, administrative costs, etc) and figuring out the minimum it takes per month to pay everything off in the 36-60 month time frame. The ceiling is determined in the same way, only determining the amount needed to pay everything including unsecured debts. The great thing about Chapter 13 is that a borrower will never pay back more than what is owed!
From there, a complex calculation (aka the Means Test) is done to determine if the individual can afford to pay any amount above the floor. For most people however, this calculation says that they can not afford to pay back any extra and the floor is the Plan payment amount. For some that are fortunate enough to have high-paying jobs, it may be determined that there is extra money, and they may be required to pay back some or all of their unsecured debt. Therefore, their payment would be in between the floor and ceiling. The Plan payment is capped at the ceiling (all of the debt.)
Even if that made sense, one can see that things are complicated. Most questions about Plan payments are answered by “it depends.” Fortunately, a Plan payment is something that we can calculate using provided information before filing. Usually, individuals save hundreds per month month. Hundreds add up to thousands and thousands saved feels pretty good!
Chapter 13 Costs
While we try to be competitive and fair in our fees. Each case is treated individually. On average, the total fee charged for a Chapter 13 can start at $3000 in a basic case and go upward from there. We understand that most people who need to file bankruptcy are cash-strapped, so we often only require a small down-payment, and the balance of the attorney’s fee is paid through the Chapter 13 Plan.
The total cost of filing a Chapter 13 Bankruptcy will depend on how complex the case will be, and whether the individual is filing individually or jointly, married without the spouse filing, or as a business. The Court charges a filing fee of $281. Another required cost is taking a required credit counseling before the case is filed which will cost from $15 to $40. Some people also may choose to purchase a credit report which can range from $0 to $50.
Some law firms charges based on factors such as:
- whether the individual is a below or above median household;
- the number of creditors;
- the number and type of assets;
- potential non-dischargeability issues;
- extent of tax debt;
- complexity of Chapter 13 Plan.
Pros and Cons
Advantages of Chapter 13 Bankruptcy
Chapter 13 Bankruptcy, in some circumstances, can offer significant advantages. The main advantages are:
- More debts are dischargeable in Chapter 13 Bankruptcy than in Chapter 7 Bankruptcy;
- Non-dischargeable debts can be repaid through the Chapter 13 Plan (these include back taxes and child support). In many cases the monthly payment required will be substantially less than the creditor, such as the IRS, was requiring prior to the filing of the bankruptcy.
- In a Chapter 13 bankruptcy, an individual can keep property that is not exempt and would have been liquidated by the Chapter 7 Trustee.
- In a Chapter 13, many secured debts can be reduced to the value of the property involved. This is called a “cram-down.” For example, if an individual owes the bank or finance company $10,000, but the car which is the collateral for the loan is worth $7,000, the secured creditor will be paid the $7,000 plus interest through the Plan. In the majority of cases, the interest rate paid through the Plan is substantially lower than what was being paid before the bankruptcy was filed.
- A Chapter 13 can stop auto repossessions and home foreclosures and allow an extended period of time to pay these items, instead of having to catch up all at once outside of bankruptcy.
Disadvantages of a Chapter 13 Bankruptcy
While Chapter 13 Bankruptcy can offer some real advantages to an individual, there are significant disadvantages as well:
- Chapter 13 Bankruptcy cases now come under greater scrutiny from the Court and from the Trustee. This is not a reason not to file a Chapter 13 Bankruptcy though. The very foundation of the Bankruptcy Code is to provide relief for the honest person.
- A person in a Chapter 13 Bankruptcy cannot sell any property without approval from the court.
- A person in a Chapter 13 Bankruptcy cannot borrow any money without approval from the Chapter 13 Trustee.
- A Chapter 13 Bankruptcy case requires a person to be “in bankruptcy” for at least three years, whereas a Chapter 7 Bankruptcy case is normally concluded in three to four months.
- Lump-sum distributions such as personal injury and worker’s compensation settlements are considered future income and, if not exempted, may be considered as disposable income and may have to be turned over to the Trustee to disburse to unsecured creditors. There may be exemptions available for a portion or all of a personal injury or workers compensation settlement depending on the particular case facts.
Missing a mortgage payment if there is any other option is one of the worse things that a homeowner can do, especially if it is a reasonable mortgage payment and equity exists in the house. Always pay a mortgage before paying unsecured debt. If there is a loss of income, try refinancing a car, have a garage sale, and do everything possible to stay current. If this has happened, there is still hope. It’s possible to catch up on past due mortgage payments through a Chapter 13 bankruptcy. This allows to repay the past due amount (the arrearage) over up to five years usually at zero interest.
That sounds good, but is there a catch? Sort of—the homeowner has to be able to stay current on future mortgage payments. As part of the Chapter 13 process, the debtor presents a Plan for catching up and a budget that demonstrates the ability to afford both the Chapter 13 payment and the future mortgage.
This works in the majority of cases if there is stable income going forward. Chapter 13 may also lower car payments and eliminate unsecured debt payments (assuming paying unsecured debt is unaffordable).
No one should wait until the last minute to seek out help, though. Even if there is no foreclosure notice yet, once income is stable, it may be necessary to file the bankruptcy and begin catching up. If someone waits until the account is referred to a foreclosure attorney, there will be substantial additional charges for attorney’s fees. The case must be filed before the foreclosure sale in order to save the home. Unlike some other states, in States such as Texas, there is no right of redemption or right to reclaim the home after the sale. If there is a valid foreclosure, and the case was filed before the sale, the home is gone.
Similar to foreclosure, it’s a bad idea to get behind on car payments if there’s any other choice. If there is equity in the car and the payments are reasonable, do everything possible to stay current. However, this may not apply if there are multiple cars and one or more is not absolutely necessary. We live in a time where every person with a driver’s license has his own car. If there is a scenario where it may be possible to live without the extra car, the person should consider surrendering it and getting out from under the debt (and payment!)
However, if a car becomes behind, even a single day (and certainly months behind), the creditor is probably within their rights to repossess the vehicle. Repossession is the infamous scene from Hollywood with the tow truck backing up to the vehicle in the driveway and pulling off with the owner’s personal possessions still inside! This is certainly a stressful and embarrassing scenario to live through.
Threat of repossession is removed with bankruptcy. The automatic stay (the fancy word for making the creditors stay put!) protects an individual from any collection activity whatsoever, including repossession. If an auto loan creditor is indicating that the car is going to be “sent to repossession,” that means a bankruptcy needs to be filed immediately. Hopefully, a person in this situation would have already reached out to a bankruptcy attorney.
Luckily, and unlike foreclosure, there is a right of redemption period for vehicles that are repossessed. Typically, an individual has a few days to file a bankruptcy after a car is repossessed to get the vehicle back. Assuming the creditor follows the procedures required under the law, once the vehicle is sold, it is too late.
Catch Up on Debt
Chapter 13 is really great at catching up on important debts. The most popular debts including in a Chapter 13 Bankruptcy “reorganization” is the amount behind on a mortgage or an auto loan. However, there are some less common debts that a Chapter 13 can help an individual catch up on. Among these debts are property taxes on a home, child support, and in some instances, student loans.
Property taxes in Texas can be burdensome, especially if they are not escrowed through the mortgage payment and are paid directly each year. Property taxes can range from hundreds to thousands of dollars, and are due every January. This large lump sum can be difficult to pay when the time comes. Chapter 13 can be very useful at including any past due property taxes in a Chapter 13 Plan and repay the amount over 3 to five years at a reasonable interest rate.
Past due child support can also be paid in a Chapter 13 Plan. Similar to taxes, the State that administers the past due child support is a “Super Creditor” and can garnish wages rather severely, which can be utterly unaffordable. Paying the past due child support over 3 to 5 years can be the most affordable option.
Payment of student loans, in some circumstances, can be included in a Chapter 13 Plan when all other unsecured debts are being paid as well. We refer to this scenario as a 100% Plan. The 100% is referring the the amount of unsecured debt being paid–all of it. If the vast majority of the unsecured debt is student loans, then it could be a good option to include the student loans in the Chapter 13 Plan. This is a rare solution, however, because for most recently issued “government backed” student loans, there is an income-based repayment option that is cheaper than the payment under the Chapter 13 Plan.
Often called a “341 meeting” or “Meeting of Creditors”, the hearing will take place about a month after filing the case (more specifically, as little as 21 days and up 50 days after.)
Hearings dates and times are usually chosen by the Court a few days after the case is filed. The Court gives a minimum of 21 days notice before the hearing date. Each hearing is assigned a specific time, like 9:15am or 2:00pm depending on Jurisdiction.
The people at the place of the hearings are other individuals waiting for their hearing, their attorneys, and the Trustee, along with his staff. The hearings take place in the Chapter 13 Trustee’s office in Federal building of any given City where the Bankruptcy was filed. Also, “Meeting of Creditors” is a slight misnomer because creditors seldom ever show up.
Chapter 13 hearings are slightly different than Chapter 7 hearings in that the Trustee is different and the place is different.
The attorney attends the hearing with the client and is present the entire time. One of the Trustee’s staff will ask a series of questions relating the debtor’s finances and their bankruptcy petition and schedules The entire hearing will usually last from 5 to 30 minutes.
In some States, the Chapter 13 Trustee offer a free “Debtor Education” course. This course is required to receive a discharge and costs around $15-20 if not taken with the Trustee. Homeowners are encouraged to attend this meeting because they get to meet the staff of the Trustee and learn more about the workings of a Chapter 13 Bankruptcy. The Trustee’s staff will give tips and tricks that will ensure a successful case. This course is scheduled the same day at the hearing for convenience.
A Chapter 13 Discharge comes after the Plan is completed–no surprise. There are several instances that a Plan could be determined to be “complete.” Most commonly, it is after the final payment of the Chapter 13 Plan.
In a textbook Chapter 13 case, the individual makes their Plan payments, has no other financial blunders, and finishes the term of Plan, whether that be 36 months, 60 months, or somewhere in between. Once they have made the final payment, the Trustee begins a process that takes 60-90 days to complete. This process includes verifying all the financial data, ensuring all creditors were paid properly, and all requirements have been met. After he completes this, he recommends a Discharge to the Judge. The Judge will then issue the Discharge and begin closing the case. The debtor will receive the Order of Discharge within a few days of the Judge signing. Freedom from debt can now be enjoyed!
Fortunately, a Chapter 13 is a little more flexible than a Chapter 7 as far as the issues that may arise. It is still critically important to disclose all assets, debts, and any information that the bankruptcy petition inquires about.
An issue that is an increasing problem with the poor economy is infeasibility. Infeasibility is a fancy term for “can’t afford it.” A Chapter 13 can catch up on mortgage payments, and that’s fantastic, but what if the mortgage itself is larger than the individual’s total income? Does the Chapter 13 really help any? Well, not really. A Chapter 13 is great a reorganizing debts, but its obviously not great at increasing income. Sometimes, income is the greater issue, not the debt. This situation calls for some hard decision making and thorough advice from a knowledgeable attorney. No one wants to live a life on the hamster wheel. Sometimes, we need to jump off the wheel to actually get anywhere.
Your Next Step to Debt Relief
Whether your financial situation makes bankruptcy a good option or there is another alternative to solve your debt issues, the next thing you should do is get a free consultation from an experienced Bankruptcy Attorney. While our program has details on how homeowners can use Bankruptcy to save their homes Pro-Se. We have to be Honest to struggling homeowners. Bankruptcy is not something you would want to do on your own. An experienced attorney will discuss your case and review the best solutions with you. There is no obligation to pay anything, and this consultation will give you the knowledge you need to move forward with whatever decision you make.
If you find yourself in an unfortunate situation of losing or about to your home to wrongful fraudulent foreclosure, and need a complete package that will help you challenge these fraudsters and save your home from foreclosure visit: http://www.fightforeclosure.net