A Chapter 13 Bankruptcy, also known as “wage-earners” plan, is a restructuring of debt. Lasting three to five years, income is used to repay a portion of some or all of your outstanding debt. Upon filing your Chapter 13, you will submit a proposed repayment plan to the Trustee. This is known as the Chapter 13 Plan. Certain debts must be repaid in full, while other debts may be settled for pennies on the dollar. Once payments are completed, any remaining (non-student loan) unsecured debt will be discharged. A Chapter 13 Bankruptcy will also stop foreclosure proceedings against your home, or repossession attempts against your car.
Debts that must be repaid in full: In a Chapter 13 Bankruptcy, certain debts must be repaid in full. The most common debts that must be repaid are: Mortgage arrearage; secured debt; and priority debt.
One of the main reasons Debtors choose to file Chapter 13 Bankruptcy is protect the family home from foreclosure. In your Chapter 13 Plan, you must repay any outstanding mortgage arrearage (missed mortgage payments) over a period of 48 months – generally with no interest. Once your home is scheduled for a foreclosure, the lender will not stop the foreclosure unless you are able to cure the default in full. The Chapter 13 Bankruptcy is an excellent way to stop the foreclosure and offer an affordable repayment of your outstanding mortgage arrearage, thereby saving your home.
Debtors may also choose to file Chapter 13 Bankruptcy to protect collateral (generally a vehicle) from repossession or replevin from a secured creditor. In your Chapter 13 Plan, you must make payments to your secured creditors. Depending on the age and type of secured debt and the collateral, you may be able to reduce the total balance owed. You will also repay the secured debt at an interest rate assigned by the Bankruptcy Court. The current interest rate is 4.75%. We find that this rate is generally a lower rate than many of our current clients have.
Debtors may also choose to file Chapter 13 Bankruptcy to gain protection from collection efforts from priority debts. The most common forms of priority debt are back taxes and unpaid domestic support obligations. In your Chapter 13 Plan, you must repay past due priority taxes or domestic support obligations over the length of the Plan. There should be no further interest or penalties charged while you are making the repayment.
Debtors may also choose to file Chapter 13 Bankruptcy because they are ineligible to file a Chapter 7 Bankruptcy or wish to protect non-exempt property.
Repayment to unsecured creditors: In a Chapter 13 Bankruptcy your unsecured creditors (credit cards, medical bills, payday loans, etc.) are repaid according to a “liquidation analysis”, or your “disposable monthly income” as determined by the Means Test. Whichever method results in a greater repayment to unsecured creditors will be required. This amount will be repaid over a period of three to five years, and unsecured creditors will receive a pro rata portion of the amounts paid for the benefit on unsecured creditors.
For Example: Debtor has three outstanding credit cards. Credit Card 1 is owed $5,000.00. Credit Card 2 is owed $5,000.00. Credit Card 3 is owed $10,000.00. The Means Test requires the Debtor to repay $10,000.00 to unsecured creditors over the course of the Chapter 13 Plan.
In this example both Credit Card 1 and Credit Card 2 will receive $2,500.00 while Credit Card 3 will receive $5,000.00. After the Chapter 13 Bankruptcy is concluded, the remaining debt will discharged.
Chapter 13 Bankruptcy is a very technical process but can offer great relief. An experienced bankruptcy attorney can represent you through this difficult experience and ensure the best possible result.