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Chapter 13 Bankruptcy


Chapter 13 bankruptcy allows individuals with regular income to adjust the amount of debt they owe.  This type of bankruptcy allows the debtor to keep their property and pay off their debts over 3-5 years.  After filing for chapter 13 Bankruptcy, the debtor must propose a repayment plan that sets out the payments and how much the creditors will receive.  Chapter 13 bankruptcy consolidates the debtors debt into a repayment plan.  This repayment plan must be approved by the creditors.  Creditors must adhere to the terms of the plan and they may not try to collect anything from the debtor.  At the end of the proposed repayment period, any remaining debts that were owed at the time of filing are forgiven or discharged.  A creditor may not begin any collection action for a forgiven or discharged debt.  But creditors generally receive more repayment under Chapter 13 than they would under Chapter 7.  Filling for Chapter 13 will stop foreclosure proceedings  as long as it is filed before the sale and it will also stop repossession actions on a vehicle.

Who can file for chapter 13 bankruptcy?

Generally, the people who file for Chapter 13 are those who do not qualify under the means test of Chapter 7.  There is no income level means test to qualify but the debtor must have an income because the repayment plan is based on the amount that the debtor can afford.  This income can be from regular employment or another source of steady income such as social security.  The debtor’s only income requirement is that he or she make enough to support themselves and have a disposable income left over to go to debt repayment.  There is no income means test to qualify for Chapter 13 as there is for Chapter 7.  The evaluation of the debtor’s income is used to determine both the length of the plan and the amount of the monthly payments.

There is a debt limit to filing for Chapter 13.  The individual cannot have more than $360,475 in unsecured debt (ie. credit cards, student loans) and more than $1,081,400 in secured loans (ie. mortgage, vehicle loan).

A debtor also cannot file for Chapter 13 if he or she tried to file within the last 180 and the case was dismissed because of the debtor’s failure to appear in court or failure to comply with a court order.  The debtor also cannot file if the individual has received a discharge under Chapter 13 in the past 2 years or a discharge under Chapter 7 in the last 4 years.

The debtor must also receive credit counseling from an approved credit counseling agency within 180 prior to filing.

Chapter 13 Bankruptcy Exemptions

Exemptions are used in Chapter 13 cases to determine whether a debtor’s proposed repayment plan meets the requirements.  Creditors must receive at least the amount they would have received under Chapter 7 liquidation.  Under Chapter 13, the trustee calculates what property the debtor has that would be available for liquidation to pay the creditors after the debtor’s exempt property is deducted from the assets.  But the debtor will still keep the property under Chapter 13 whether or not the property is exempt.

What is Dischargeable under Chapter 13 Bankruptcy?

The debtor is entitled to a discharge of all remaining debts at the completion of the repayment plan.  But the discharge is only granted if the debtor certifies that all domestic support obligations were paid in full, the debtor did not have a Chapter 13 discharge within the last 2 years or a Chapter 7 in the last 4 and that the debtor completed the required approved course in financial management.  This discharge will release the debtor from all the debts provided for in the plan which means that creditors may not longer begin or continue collection actions on any debt that has been discharged.

There is debt that is not dischargeable.  This includes certain long term debts (ie. home mortgage), domestic support debts (ie. child support, alimony), certain taxes, education loans, benefit overpayment and certain criminal debts.

Monthly Payments

The monthly or biweekly payments the debtor will be required to pay will be based on the debtor’s income and amount of debt.  The payments are determined by the individuals disposable income.  His or her disposable income is determined by the individuals income minus amount for the maintenance and support of the debtor and his or her dependents minus 15% for charitable contributions.  This remaining amount is the amount that must be paid under the repayment plan.

(Income – (maintenance and support) – (15% charitable contributions) = monthly payments

Length of Repayment Plan

The length of the repayment plan varies depending on the case but it will be between 3-5 years.  If the debtor’s income is less than the state’s median, the plan is for 3 years unless the court approves a longer period.  The court must show cause to extend the plan beyond 3 years.  If the debtor’s income is above the state’s median, the plan is for 5 years.  No plan may exceed 5 years.

What happens to individual assets in Chapter 13 bankruptcy?

Chapter 13: In filing for Chapter 13 bankruptcy, an individual does not necessarily have to give up any assets. If a debtor can work out a repayment plan from their current income, then the debtor does not have to give up assets. In fact, Chapter 13 bankruptcy will stop a foreclosure sale on a home so long as the sale has not already been completed according to the applicable state law. If the debtor fails to make payments under the Chapter 13 reorganization plan, they could lose the house. Chapter 7 will not prevent the foreclosure proceedings.

How Will Chapter 13 Bankruptcy Effect:

Credit Card Debt

Credit card debt must be included in the repayment plan but since it is unsecured debt it is given a low priority and generally does not have to be repaid in full to be discharged.

Second Mortgage

The debtor may be able to eliminate the second mortgage if the amount owed is more than the value of the property.  For the debt to be eliminated, the value of the home must be less than or equal to the amount that is owed for the first mortgage.  If the value of the home cannot cover the debt of the first mortgage, the court can choose to strip off the second mortgage and turn it into an unsecured debt.  Unsecured debts are given the lowest priority and are generally not paid in full.

Unsecured Debt                                   

The creditor of an unsecured debt must be paid back at least the amount that the creditor would have received under a liquidation or Chapter 7 bankruptcy.  Though in most cases, the debtor ends up not having to pay back most of the unsecured debts.

Cram Down

“Cram Down” lowers the amount that the debtor owes on a secured debt but this is not available for the house.  Cram down can occur if the amount owed on a secured debt is more than the value of the property.  Being “underwater” on a piece of property (ie. debtor’s car) is the reason for choosing bankruptcy for most individuals.  If the value is less than the amount owed, the amount owed is “crammed down” to the value of the property.  Therefore, the debtor will only owe the value of the item and not the full balance of the debt.

Lien Stripping

Lien stripping is similar to a cram down.  It occurs when the debt exceeds the value of the property.  Under lien stripping, the lien is stripped down to the value of the collateral or property that was used to secure the loan (ie. home for a mortgage or vehicle for a loan).  The exception is that a lien securing the debtor’s residence may not be changed.

Failure to Make Payments

Failure to make payments under the repayment plan voids the repayment plan.  A court has the right to dismiss the case after only 1 missed payments but courts generally allow the debtor 30 days to make the missed payment before dismissal.  If the case is dismissed for failure to make a payment, the debtor cannot file for another 180 days.  Also, creditors can continue collection efforts because the debtor’s debts are not discharged until the plan has been completed.

The court may allow a hardship discharge.  The debtor may request a hardship discharge if circumstances beyond the debtors control prevent the debtor from completing the plan.  This is available only if the failure to pay is not the debtor’s fault, if the creditors have received at least as much as they would have under liquidation or Chapter 7 and modification is not an option.  The most common source of a hardship discharge are illness or injury that prevents the debtor from continuing to work.

Appeal Dismissal

If the debtor’s case is dismissed prior to discharge, the debtor has the right to appeal the dismissal.  If the individual chooses to appeal, the debtor will have to fill out and submit a notice of appeal within 10 days of the dismissal.  The debtor will also have to fill out and serve a statement of the issues which lists the elements addressed in the appeal within 10 days of the dismissal.  The debtor will also have to serve a brief of the general outline of the case, arguments and evidence to the court within 15 days of the dismissal.  After all of the filings, the debtor will then have to show up to court on the date of the appeal hearing.

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