Chapter 13 Bankruptcy
Chapter 13 Bankruptcy enables individuals with regular income to develop a plan to repay all or part of their debts over a period of 3 to 5 years. This requires sufficient disposable income above living expenses. The purpose of the automatic stay in Chapter 13 cases is to give people in debt some breathing room so they can decide how to reorganize their finances. A business in financial difficulty is said to file a Chapter 11 to allow the business to restructure their debt. Businesses continue to operate while in bankruptcy and when their reorganization plan is successful they are said to “come out” of bankruptcy and begin normal operations again. The Chapter 13 works in a similar way for individuals.
There are many good reasons to file Chapter 13. Individual debtors most often use this provision of the Bankruptcy Code to save homes from foreclosure or cars from repossession. While it should be regarded as the debt management tool of last resort, a Chapter 13 is a powerfully effective way to keep family homes. It stops a foreclosure dead in its tracks, as well as seizure of property by the IRS and other tax collectors. The lender must obtain the Bankruptcy Court’s permission to continue. This is not frequently granted.
A Chapter 13 debtor must file a Chapter 13 Plan to show how they will catch up on a mortgage and handle other debts such as taxes and credit cards or auto loans. The debtor must prove they can afford to pay their living expenses (mortgage, food, utilities, etc.) while being able to pay creditors by making payments to the trustee. Your lawyer prepares this with your help providing the necessary information. The Court must approve the repayment plan. This occurs at a Confirmation Hearing, which is usually 45 days after the Meeting of Creditors. The attorney attends this hearing on behalf of the client, who is not required to appear. Generally, the plan is approved or confirmed if it complies with the applicable provisions of Chapter 13.
The Chapter 13 debtor is given 3 to 5 years to catch up on missed payments while making regular current payments on mortgages and car or other loans. Some debts, such as second mortgages or Home Equity Lines of Credit (HELOC’s), may be eliminated without paying anything on them, or substantially less than what is owed, or only what the collateral (property) may be worth. This is called cram down, and can be incorporated in the Chapter 13 Plan. During this time the law forbids creditors from starting or continuing collection efforts.
Chapter 13 debtors must make monthly payments to the Chapter 13 trustee, starting the first month after the petition is filed. The trustee will send the debtor a list showing what money was collected from the debtor and paid out to the creditors. The trustee gets a small percentage of the money paid by the debtor. People who file Chapter 13 bankruptcy cases get to keep most, if not all, of their property so long as they make the payments called for under their Chapter 13 Plan. There are exceptions to this rule because every case is different.
After the debtor has made all payments called for in the plan and the trustee has disbursed the money to creditors, the debtor will be given a Bankruptcy Discharge. No longer is any money owed, other than for secured property such as a house or car.
NOTICE: The decision to file bankruptcy is a serious choice. Bankruptcy is not for everyone. It is a drastic remedy that can affect your credit for many years and will affect your ability to use the Bankruptcy Code at a future time when you may need it more. Some chapter 13 plans are never successfully completed and the funds paid do not cure the mortgage arrears or allow redemption of property. Upon filing a bankruptcy you may lose control of your property and you may not dismiss a bankruptcy proceeding without court approval once it is filed. The decision of when to file a bankruptcy is also crucial and dependent on your individual circumstances. Be sure to discuss the potential pitfalls of bankruptcy as well as its advantages with any professional you are considering.