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CHAPTER 13 BANKRUPTCY
Chapter 13 Bankruptcy – What Can It Do For Me?
Chapter 13 is often referred to as the “wage-earners” repayment plan. Businesses and corporation DO NOT qualify to file a Chapter 13. Only individuals may file. If I decide that bankruptcy is the best option for you, we will file a Chapter 13 if you are ineligible for a Chapter 7 or you want to take advantage of the distinct benefits of a Chapter 13 payment plan. Chapter 13 is essentially a court approved debt reorganization in which you to repay a portion of your debts over a 3 to 5 year period, depending on the amount of money you make. A Chapter 13 bankruptcy is most beneficial in the following situations:
- You want to keep your house and car and have the ability to catch up your delinquent payments through the Chapter 13 plan.
- You want to retain assets that would normally be taken by the Chapter 7 Trustee in a Chapter 7 case.
- You want to repay certain debts that cannot be discharged in a Chapter 7 bankruptcy case, such as recent tax debts.
- You can discharge certain debts, like property settlements in divorces and non-criminal fines in a Chapter 13 that you cannot in a Chapter 7.
Do I Qualify?
The most important requirement to file a Chapter 13 bankruptcy case is to have a regular source of income. If you do have a source of income and your secured (house, car, etc.) debts are less than $1,184,200.00 and your unsecured debts (credit cards, medical bills, personal loans) are less than $394,725.00. If your debts exceed this debt limit, you’ll have to file a Chapter 11 bankruptcy instead.
Chapter 13 offers individuals a number of advantages over filing a Chapter 7. Perhaps most significantly, Chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. The same holds true for delinquent car payments.
Another advantage to filing a Chapter 13 is that a Debtor can “cram-down” a secured creditor to the value of its collateral. This process is best explained through an example. You have a car that you financed over 910 days ago. You owe $15,000 on the car. The car is only worth $6,000. Pursuant to the Bankruptcy Code, we can “cram-down” the debt on this car from $15,000 to $6,000, or whatever the fair market value of the car is. We can also lower the interest rate to more manageable levels to significantly lower your payments to certain secured creditors.
STRIP YOUR SECOND MORTGAGE
One of the biggest benefits of filing Chapter 13 is the ability to wipe out your second mortgage or Home Equity Line of Credit (HELOC) through bankruptcy. Debtors may “strip” the second lien from their house in the situation in which the amount owed on the first mortgage is more than the value of the house. For instance, if your house is worth $150,000 and the first mortgage balance is $160,000, there is no value for the second mortgage to attach to. At this point, I would file a motion with the bankruptcy court against the junior lender to have the second mortage deemed unsecured. Because the second mortgage will be deemed unsecured, it will be discharged once you make all payments required under the Chapter 13 Plan. After bankruptcy, you will only be obligated to pay the first mortgage. Lien stripping is one of the most powerful tools of Chapter 13 and offers significant benefit to certain debtors. If you have two mortgages on your home and cannot afford the payments, drop me a line to see what we can do.
HOW MUCH WILL MY PLAN PAYMENTS BE?
A Chapter 13 Debtor must pay over all disposable income, as determined by a set formula, to the Chapter 13 Trustee to be disbursed to unsecured creditors over the plan period. Any portion of your unsecured debts that are not paid through the plan will be discharged, or wiped out, once you make your last plan payment to the Trustee. For instance, if you are taking in $5000 per month and your expenses are $4000 per month, your plan payment will be approximately $1000 per month for the next five years. It takes an experienced bankruptcy attorney to run your finances through the Chapter 13 means test to best optimize your plan payments to account for the typical ups and downs of life.
Calculating your disposable income is just one factor to consider when determining your plan payment. Creditors must also receive as much through the Chapter 13 plan as they would if you filed a Chapter 7. To break this down, if you have a $100,000 piece of land that has no lien on it, we have to calculate how much your creditors would receive in a hypothetical Chapter 7 case and pay THAT amount through the Chapter 13 plan. Using this example, real estate commissions are often 6% and a trustee will take a portion of that $100,000 as a fee for selling the land. If your creditors would receive $80,000.00 from the sale of your land in a hypothetical Chapter 7, then you would have to pay $80,000 into your Ch. 13 over a 5 year period of time.