Chapter 13 Bankruptcy
A lot of people file Chapter 7 bankruptcy and just have their debts wiped clean. They get a fresh start that way, but they may also lose some of their assets, and not everyone is eligible. For people who are earning steady wages, Chapter 13 is often a much better option because it allows a person to come up with a plan to repay a portion of the debts that are owed and receive a complete discharge of the debts. You may also be able to keep your house, car and other assets. Chapter 13 allows you to reduce the amount you owe on certain secured debts to the value of the collateral. This remedy (called a cramdown) makes it easier to keep some kinds of collateral, like a car. Chapter 13 also allows you to strip off junior liens on a home if the value of the home is less than the first mortgage. The stripped loan is reclassified as an unsecured loan.
Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy requires a payment plan. The Plan requires you to keep current the debts that secure collateral that you want to keep like a mortgage or car note and pay off priority debts like back taxes, back child support owed to a child or ex-spouse, and any mortgage and secured debt arrearages that you owe. You also have to pay unsecured creditors as least as much as they would have received had you filed for Chapter 7 bankruptcy. This means the payments must be at least equal to the value of your nonexempt property, less the costs and fees that would have to be paid in order to sell the property. The repayment plan lasts from three to five years. If the debtor's gross monthly income for the six month period before filing is less that the median, the debtor may propose a three year plan and use actual expenses to calculate how much income will be devoted to the plan. Debtors whose income is more than the median must propose a five year plan and use standard expense amounts set by the IRS to calculate the plan payments.
There are many good reasons for choosing a Chapter 13 bankruptcy over a Chapter 7 bankruptcy. Chapter 13 may help you if you have steady income to fund a plan and any of the following apply:
Some of your property may be exempt, as well, and you will need to make sure you exempt it properly if you want to keep it. You usually have between three and five years to repay the debts that are included in a Chapter 13 bankruptcy and most of the debts usually have their interest rates and principal amounts adjusted so that they are easier to repay. Payments must be made properly to minimize the damage to your credit, but if something serious and beyond your control keeps you from completing the plan, a hardship discharge is also possible, which would be more like a Chapter 7 bankruptcy proceeding.
Chapter 13 generally permits individuals to keep their property by repaying creditors out of their future income. Each chapter 13 debtor proposes a repayment plan which must be approved by the court. The amounts set forth in the plan must be paid to the chapter 13 trustee who distributes the funds for a percentage fee. Many debts that cannot be discharged can still be paid over time in a chapter 13 plan. After completion of payments under the plan, chapter 13 debtors receive a discharge of most debts.
After completing the schedules for a Chapter 13 reorganization of debt, consumers in Northern California need to make sure to avoid the following pitfalls:
1) Live with your payment plan. You've worked carefully to establish a workable monthly budget and it is vital to stick to it. Statistically most Chapter 13 bankruptcy plans fail because consumers do not anticipate unexpected expenses. Make sure you budget for expected and unexpected expenses such as car and home repairs or medical costs before you file your plan. The benefits of completing the plan far outweigh the added costs and inconveniences if your case is dismissed.
2) Even if you are surrendering your house, you may be responsible for debts such as property insurance, property tax, homeowners association dues and utilities accruing after the bankruptcy. Make sure that your budget considers these expenses so that you do not have unexpected debts that cause your plan to fail.
3) Home and vehicle loan payments. If your home or vehicle loans are designated to be paid outside the Chapter 13 plan make sure that you keep those payments current. If you default on those payments you are at risk for having the plan dismissed. Also keep in mind that you'll have to initiate the monthly payments on your own. Billing statements and/or automatic payments made from a bank account before the bankruptcy will cease immediately after filing for bankruptcy.
4) You will be required to file an income tax return and provide it to the trustee each year of your Chapter 13 bankruptcy. Make sure that you are paying the correct amount of tax and make adjustments if your income or deductions change because you will not be allowed to keep your tax refund if you over pay your taxes during the year.
If you are considering a Chapter 13, you need to see a lawyer. Like a Chapter 7, it is not something that you should try to do on your own. You will need a lot of paperwork. You have to itemize your debts and your income and provide details on the major financial transactions that you have taken part in during the last two years. You will need income tax statements, car titles, and a lot of other financial information. You will have to follow the guidelines that your Federal District has set out and adhere to the schedule and plan that is designed for you if you are eligible for a Chapter 13.
Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy requires a payment plan. The Plan requires you to keep current the debts that secure collateral that you want to keep like a mortgage or car note and pay off priority debts like back taxes, back child support owed to a child or ex-spouse, and any mortgage and secured debt arrearages that you owe. You also have to pay unsecured creditors as least as much as they would have received had you filed for Chapter 7 bankruptcy. This means the payments must be at least equal to the value of your nonexempt property, less the costs and fees that would have to be paid in order to sell the property. The repayment plan lasts from three to five years. If the debtor's gross monthly income for the six month period before filing is less that the median, the debtor may propose a three year plan and use actual expenses to calculate how much income will be devoted to the plan. Debtors whose income is more than the median must propose a five year plan and use standard expense amounts set by the IRS to calculate the plan payments.
There are many good reasons for choosing a Chapter 13 bankruptcy over a Chapter 7 bankruptcy. Chapter 13 may help you if you have steady income to fund a plan and any of the following apply:
You have a co-debtor who will be protected under the Chapter 13 plan, but would not be protected in a Chapter 7.In order to qualify for Chapter 13 bankruptcy, your debts cannot be too high. Chapter 13 is the debt repayment chapter for individuals with regular income whose debts do not exceed $1,441,875 ($360,475 in unsecured debts and $1,081,400 in secured debts). Chapter 13 applies to individuals who operate businesses as sole proprietorships. It is not available to corporations or partnerships.
You have a retail business that you would have to close down in a Chapter 7 bankruptcy but can continue to operate in Chapter 13.
You would like to repay your debts, but you need the assistance of the bankruptcy court to create a plan for the repayment.
You are threatened with a foreclosure or repossession and you want to keep your house or car. Chapter 13 will allow you to pay arrearages in a payment plan and reinstate your original agreement.
Your car was purchased more than 2.5 years ago and is worth less than you owe. You can use the Chapter 13 cramdown option by repaying the replacement value in the plan, rather than the full amount of the loan.
You have more than one loan on your house and the value of the house is less than the first loan. Chapter 13 will strip the junior liens and convert them to unsecured debts.
Your vacation or investment property is worth less than the loan. You can have the loan reduced to the value of the property.
You have a tax obligation, student loan, or other debt that cannot be discharged in bankruptcy, but can be paid off over time in a Chapter 13 plan.
Some of your property may be exempt, as well, and you will need to make sure you exempt it properly if you want to keep it. You usually have between three and five years to repay the debts that are included in a Chapter 13 bankruptcy and most of the debts usually have their interest rates and principal amounts adjusted so that they are easier to repay. Payments must be made properly to minimize the damage to your credit, but if something serious and beyond your control keeps you from completing the plan, a hardship discharge is also possible, which would be more like a Chapter 7 bankruptcy proceeding.
Chapter 13 generally permits individuals to keep their property by repaying creditors out of their future income. Each chapter 13 debtor proposes a repayment plan which must be approved by the court. The amounts set forth in the plan must be paid to the chapter 13 trustee who distributes the funds for a percentage fee. Many debts that cannot be discharged can still be paid over time in a chapter 13 plan. After completion of payments under the plan, chapter 13 debtors receive a discharge of most debts.
After completing the schedules for a Chapter 13 reorganization of debt, consumers in Northern California need to make sure to avoid the following pitfalls:
1) Live with your payment plan. You've worked carefully to establish a workable monthly budget and it is vital to stick to it. Statistically most Chapter 13 bankruptcy plans fail because consumers do not anticipate unexpected expenses. Make sure you budget for expected and unexpected expenses such as car and home repairs or medical costs before you file your plan. The benefits of completing the plan far outweigh the added costs and inconveniences if your case is dismissed.
2) Even if you are surrendering your house, you may be responsible for debts such as property insurance, property tax, homeowners association dues and utilities accruing after the bankruptcy. Make sure that your budget considers these expenses so that you do not have unexpected debts that cause your plan to fail.
3) Home and vehicle loan payments. If your home or vehicle loans are designated to be paid outside the Chapter 13 plan make sure that you keep those payments current. If you default on those payments you are at risk for having the plan dismissed. Also keep in mind that you'll have to initiate the monthly payments on your own. Billing statements and/or automatic payments made from a bank account before the bankruptcy will cease immediately after filing for bankruptcy.
4) You will be required to file an income tax return and provide it to the trustee each year of your Chapter 13 bankruptcy. Make sure that you are paying the correct amount of tax and make adjustments if your income or deductions change because you will not be allowed to keep your tax refund if you over pay your taxes during the year.
If you are considering a Chapter 13, you need to see a lawyer. Like a Chapter 7, it is not something that you should try to do on your own. You will need a lot of paperwork. You have to itemize your debts and your income and provide details on the major financial transactions that you have taken part in during the last two years. You will need income tax statements, car titles, and a lot of other financial information. You will have to follow the guidelines that your Federal District has set out and adhere to the schedule and plan that is designed for you if you are eligible for a Chapter 13.