CHAPTER 13 BANKRUPTCY

Chapter 13 is a section of the Bankruptcy Code which helps qualified individuals, or small proprietary business owners (NOT a corporation or partnership), who desire to repay their creditors but are in financial difficulty. Among other things, it offers great opportunities to pay off past due mortgage or car payments over 36-60 months, giving you time to catch up and keep your property. It is often referred to as a "mini Chapter 11" because you usually repay something to your creditors and you retain your property and make payments under a Plan.

One purpose of a chapter 13, as opposed to a chapter 7, is to enable a debtor to retain certain assets (for example, your home) that might otherwise be liquidated by a chapter 7 Trustee. It also provides an alternative to Chapter 7 when you have too much "disposable income" (your net monthly income exceeds your net monthly expenses by too much) and usually yields much lower monthly payments than you were previously paying and (here's the real benefit), after 36 months, you are done! Your debts are gone. (See below) It also enable you sometimes to discharge debts that would not be discharged in a Chapter 7, such as a fraud judgment, certain tax obligations, fines, penalties, and other debts.

The goal of most any personal bankruptcy is to discharge your existing debts by repaying all or a portion of your debts, and allow you a *fresh start* on your finances. In other words, once your discharge is granted, you no longer need to repay the debts that were incurred before you filed your bankruptcy.

Assuming you need to file a bankruptcy, the only way to determine which Chapter to file under is to first compare your options under the other available Chapters.

WHO MAY FILE?

Only an individual with regular income who owes, on the date you file the petition, less than $290,525 in unsecured debt and $871,550 in secured debts. These debts must also be noncontingent and liquidated, meaning that they must be for a certain, fixed amount (or easily determinable amount) and not subject to any conditions or bona fide disputes.

WHAT ARE THE BENEFITS?

Chapter 13 protects individuals from the collection efforts of creditors; permits individuals to keep their real estate and personal property; and provides individuals the opportunity to repay their debts through reduced payments.

You may be able to discharge debts in a Chapter 13 that would be nondischargeable under other chapters, for example, fraud judgments and certain tax obligations.

You may be able to get rid of junior liens on your real property.

Certain tax repayments can be made easier by virtue of elimination of interest payments.

HOW DOES IT WORK AND HOW LONG DOES IT LAST?

First of all, you must have "regular income". Meaning, you must have some source of income that is regular, or at least can be averaged regularly on an annual basis, for example.

You are usually required to pay all of your disposable income to the Trustee (through your Plan) for 36 months (see below). Your disposable income is defined as: income received by you that is not reasonably necessary for the maintenance and support of you or your dependents. The key word in the definition is "reasonably". For example, if you are used to spending $2,000 a month on a car, you would not be allowed that much of an expense for that since that is not considered "reasonable". This is calculated by taking your monthly income and subtracting your reasonable monthly expenses. If you are interested in a consultation on Chapter 13, you should complete these forms prior to consultation. Visit my consultation page for information.

Typically, the Plan payments last for 36 months, unless additional time is requested, but in no event will they last more than 60 months. Therefore, if your payment analysis shows, for example, that you can afford to pay $200.00 per month (above and beyond your normal living expenses), you would pay that each month to the Chapter 13 Trustee, who would disperse it pro rata among your creditors. At the end of 36 months, you are discharged from all dischargeable unsecured debts, regardless of how much your creditors have received.

In addition to your plan payments, you must stay current with any ongoing obligations you have to secured creditors, such as on your mortgage. Chapter 13 (or any chapter of bankruptcy for that matter) only affects debts that you owe on or before you filed the bankruptcy. Therefore, on your mortgages and other secured debts, your monthly Plan payment goes to pay any arrearages (past due amounts) that existed on the date you file and you can repay that arrearage over the life of the Plan; but, you must stay current from the filing date forward with any mortgage payments, etc.

Secured debts (your mortgages) must be repaid in full, but Chapter 13 enables you to cure the defaults (reinstate the loans) over 36 months (or up to 60 months with creditor consent and court approval). You also have the ability to eliminate junior liens from your real property under certain circumstances and restructure mortgage and certain other payments. (Click here for more information on this!!)

HOW MUCH WILL I HAVE TO PAY EACH MONTH?

The size of your monthly plan payments is determined by the amount you can afford to pay after paying necessary living expenses (including insurance, mortgage payments, etc.). You must prove your income to the Trustee. Usually this is done with paycheck stubs. In the case of a business, you would need to average out your income and expenses for the last 6-12 months. When calculating monthly expenses you should include everything you pay money for such as food, clothing, utilities, auto maintenance, etc. You cannot include payments on unsecured debts, since those will be discharged in the bankruptcy. Also, deductions from your payroll for retirement accounts are considered voluntary and, therefore, will be added back in to your total income. Assessing the amount you will pay in a Ch. 13 is very tricky and is one of the reasons you need an experienced attorney.

Another "catch" is that you must pay out at least as much in the Ch. 13 Plan as your creditors would have gotten if you filed a Chapter 7. Therefore, if you have a lot of non-exempt assets, you would need to account for this in your plan. Depending on what your disposable income is (see above), you may have to sell some of your non-exempt assets to fund your Ch. 13 plan. If this is the case, you might just as well file a Chapter 7, but not necessarily.

SOME DISADVANTAGES:

If you miss any payments at all that are due under your Plan, your case will be dismissed by the Court.

You cannot borrow money (incur new debt) exceeding approximately $250.00 during the pendency of your case (usually 3 years), without first obtaining court approval. This can be somewhat of a problem if, for example, your car lease expires and you need to get a new car during this period.

WHAT DEBTS CAN BE DISCHARGED IN CHAPTER 13?

First of all, any debt that you CAN discharge in a Chapter 7, will also be dischargeable in a Chapter 13.

Another thing to bear in mind is that approval of ANY Chapter 13 Plan of repayment requires a determination by the court that the case is filed and the plan proposed in Good Faith.