What is Chapter 13 Bankruptcy?
Chapter 13 is a reorganization for individuals. It is a simpler and less expensive version of a chapter 11 filed by businesses. In Chapter 13, you will work with a Trustee to create a payment plan lasting 3 to 5 years. The plan consolidates and restructures your debt payments to make them more affordable.
To understand chapter 13 you must understand the difference between “secured debt” and “unsecured debt”. Secured debt is debt that is attached to collateral such as a mortgage or car loan. Unsecured debt has no collateral. Credit cards and medical bills are examples of unsecured debt.
Chapter 13 can be used to save your home from foreclosure by forcing the bank to work out an affordable payment plan. Typically when a mortgage goes into foreclosure, the mortgage company will demand all of the back payments (the arrearage), plus thousands of dollars in attorney fees and court costs be paid upfront in order to dismiss the case. The Chapter 13 Plan allows you to spread the arrearage payments over five years. After completion of the plan, the mortgage would be reinstated and the foreclosure dismissed.
Car loans can also be modified in chapter 13 in order to decrease the payments. The plan reduces interest rates, stretches out the term of the loan and in some cases strips down the principal amount of the loan based on the value of the car at the time the case is filed.
The Chapter 13 plan will consolidate the payment on your unsecured debt. The plan payment is based on your non-exempt assets and your earnings. The Trustee will calculate your disposable income by taking your average income and subtracting certain expenses according to Floirda and national standards. After you’ve subtracted your allowable monthly expenses and required payments, you’re left with your “disposable income.” Certain expenses such as mortgage payments, child and spousal support payments, tax debts, and auto loan payments may be allowed to further reduce your disposable income. Your disposable income is what you’ll have to contribute to your Chapter 13 plan each month. You’ll make payments to the Bankruptcy Trustee and who will distribute the payments among your creditors. While the plan is in effect, the bankruptcy code protects you from lawsuits, garnishments, and other creditor actions in order to give you the opportunity to resolve the financial difficulties you are facing.
When the plan is completed, your remaining unsecured debts will be wiped out or discharged. Many Chapter 13 filers end up paying pennies on the dollar for their unsecured debts.
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Chapter 13 Bankruptcy FAQ
Why file a Chapter 13 bankruptcy?
A Chapter 13 can save your home by giving you 5 years to catch up on your mortgage and your home being lost in foreclosure. A Chapter 13 can give you debt relief if you make too much money to file a Chapter 7 or do not want to lose non exempt assets in a Chapter 7.
If I file Chapter 13, will I end up paying all of my debts back?
The majority of those who file Chapter 13 are not required to pay all of their debts back. The repayment is based on your household income, expenses, and non exempt assets.
Chapter 13 Frequently Asked Questions
Why file a Chapter 13 bankruptcy?
A Chapter 13 can save your home by giving you 5 years to catch up on your mortgage and your home being lost in foreclosure. A Chapter 13 can give you debt relief if you make too much money to file a Chapter 7 or do not want to lose non exempt assets in a Chapter 7.
If I file Chapter 13, will I end up paying all of my debts back?
The majority of those who file Chapter 13 are not required to pay all of their debts back. The repayment is based on your household income, expenses, and non exempt assets.
How will a Chapter 13 bankruptcy affect my credit?
A Chapter 13 bankruptcy stays on the credit report for 7 years. Notwithstanding the length of time that the bankruptcy stays on your credit report, many people find that they are able to obtain new credit including automobile loans and low money down FHA mortgages during the time that the bankruptcy is still being reported on their credit report.
How can Chapter 13 help save my house?
The filing of a chapter petition results in an automatic stay of the foreclosure proceeding. A Chapter 13 bankruptcy will allow you to make monthly payments to catch up on your back payments.
What is the Mean Test?
The Means Test is used to determine if you qualify for a Chapter 7. It takes into account your family size, household income and expenses to determine if you have disposable income available to pay towards your debts. If you fail to pass the Means Test you may be unable to file a Chapter 7, but still may be able to file Chapter 13. The amount of your disposable income is used to determine the amount of your monthly payment in a Chapter 13 reorganization.
What are exempt assets?
Bankruptcy exemptions are designed to protect a certain amount of your assets in a Chapter 7 bankruptcy. Exemptions also help in determining how much certain creditors will get paid through your bankruptcy plan if you file a Chapter 13 bankruptcy. If you can “exempt” assets in bankruptcy it means that the Chapter 7 trustee cannot take it and sell it to pay your creditors.
What happens if my income goes down or I lose my job while I am in a Chapter 13 case?
If your income goes down or you lose your job, it may be possible to reduce your payment by modifying the Chapter 13 plan. It is also possible to convert your Chapter 13 case to a Chapter 7 if your income now allows you to qualify for Chapter 7.
Can Chapter 13 lower my car payments?
A Chapter 13 can often reduce payments by reducing the amount principal balance owed to the lender based on the current value of the car. It can also reduce the interest rate to a more favorable rate (i.e. not the 12 to 15 % that some people pay with less than perfect credit).