Chapter 13 Bankruptcy
Chapter 13 is part of the Federal Bankruptcy laws, and is intended to primarily help consumers who own their own home or have other valuable property which secures debt. Sometimes a consumer owns property which would be lost if that consumer were to file a Chapter 7 bankruptcy because that property would be considered “non-exempt” property in a Chapter 7 bankruptcy. (See “Information about Chapter 7” for an explanation of what is “non-exempt” and what is “exempt” property). Often these consumers are being threatened with repossession or foreclosure of the property which secures (serves as collateral) for these debts.
In Chapter 13, a consumer keeps all of his property, whether that property is exempt or not. That is the main advantage of a Chapter 13 bankruptcy. If you own your own home, and you have more than $50,000 of equity in your home, you could be in danger of having the trustee (an attorney who works for the Bankruptcy Court) take away your home if you were to file for a Chapter 7 bankruptcy. This will not happen in a Chapter 13 bankruptcy. Again, you will keep all of your assets (including your home), whether they are exempt or not, in a Chapter 13 bankruptcy. Also, your creditors cannot repossess or foreclose on your assets (including your home) in a Chapter 13 bankruptcy.
A Chapter 13 bankruptcy, unlike Chapter 7, is a repayment plan. This means you must repay your debts over a three to five year period. However, if some of your debts are “unsecured”, you can often be allowed to pay back as little as 10% of these “unsecured” debts, over this three to five year period, with no interest being charged to you. Upon completion of your Chapter 13 bankruptcy, you will then receive a “discharge” from the Bankruptcy Court, meaning you will have no further legal obligation to repay the remaining balance of these unsecured debts. In other words, you will have paid as little as 10% of your unsecured debts over three to five years, with no interest, and have had the balance (in this example, 90%) of your unsecured debts completely eliminated.
A “secured” debt is a debt in which you have given the creditor the right to take back certain of your property that you have given as collateral, if you fail to repay that debt. The most common types are mortgages on your home or a car loan. An “unsecured” debt is any other debt, i.e., one in which you have not given any of your property as collateral to the creditor. Common examples of unsecured debt is most credit card debt and medical bills.
In Chapter 13, you must repay any arrears, i.e., past due balances on your secured debts (usually, just your mortgage and car loans) over the three to five year period. Generally speaking, you usually do not need to pay any interest on these arrears. You also must be able to pay your current monthly living expenses as they come due (including your current mortgage payments), pay a certain amount each month to the trustee as his fee, and pay the applicable percentage of your unsecured debt each month. Your first payment to the trustee is due 30 days after the Chapter 13 plan is filed. You will make one payment each month to the trustee to cover that month's portion of: (a) the arrears on your secured debt, (b) the repayment percentage of your unsecured debt, and (c) the trustee's fee. You will continue to pay your current monthly expenses directly to your merchants/service providers.
If your home is in foreclosure, you must file for Chapter 13 before the foreclosure sale date in order to stop the foreclosure. If you wait until after the sale date, it will be too late to save your home. If you have received a foreclosure summons, and the sale date has not yet arrived, you can still save your home, but you must act quickly. Do not delay.
A few words about credit counseling:
Some people are tempted to hire a credit counseling agency instead of considering Chapter 13. These credit counseling agencies often masquerade as being “not for profit” when they are in fact “for profit” businesses. Some of them, including the biggest ones who advertise extensively, are being prosecuted by the federal government for fraudulent activities. Be careful, especially if they ask you to make a “donation” to their “charitable” organization.
That aside, credit counseling has some distinct disadvantages when compared to a Chapter 13 bankruptcy. A credit counseling agency cannot force your creditors to go along with the repayment plan that the credit counselor is suggesting. Your creditors can agree to it or not - it would be strictly voluntary on their part. All you need is one creditor to not agree to the plan to ruin the overall effectiveness of the plan. If you have ten creditors and nine agree, but one is still pursuing a foreclosure action against your home, you still have a huge problem on your hands.
In Chapter 13, if the Court approves your Chapter 13 bankruptcy repayment plan, all your creditors must go along with it, whether they like it or not. You are then under the protection of the Federal Bankruptcy Laws, which provides you with some very powerful rights. Further, your case will be monitored by the Bankruptcy Court and by this Law Office (should we represent you), and we will be quick to assert your rights under the Bankruptcy Laws should a creditor attempt to violate them.
Eligibility for Chapter 13:
In order to qualify for a Chapter 13 bankruptcy, you must be able to make the payments required of you, as discussed above. You also must be an "individual" with a "regular source of income". Generally, this means you must have a job, though certain other things can qualify as a "regular source of income", such as alimony payments, a pension, government benefits or investment income. You also cannot have more than $336,900 of liquidated, unsecured debt or more than $1,010,650 of secured debt.
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