When should I consider filing a Chapter 13?
There are times when a Chapter 13 is better suited to your situation, especially if you—
- have valuable property not covered by an exemption, like equity in a home or car, but want to keep this property.
- are behind on secured loan payments a chapter 13 bankruptcy can allow the debtor to make up these payments over time while keeping the home or car.
- owe the IRS.
- do not qualify for Chapter 7.
- need relief from collection proceedings.
- have debts with co-signers.
- can pay a portion of your unsecured debts over three to five years.
Why would a debtor choose Chapter 13 over Chapter 7?
Chapter 13 is the preferred choice for a person who wishes to repay most or all of his or her unsecured debts, and whose income is sufficient to allow him or her to do so in a reasonable amount of time. In addition, if the debtor has a considerable amount of nonexempt property, or a lot of valuable exempt property used as security for debts, this property could be lost in a Chapter 7 case, so Chapter 13 may be the preferred option. Some other types of debtors, whose debts might not be discharged under Chapter 7 and those with one or more large debts that may be discharged only under Chapter 13, might opt for Chapter 13 over Chapter 7.
What is an automatic stay?
The minute the petitioner files either a Chapter 7 or Chapter 13 bankruptcy, a court ordered “automatic stay” goes into effect. The automatic stay prohibits all creditors from taking any action to collect debts owed them unless the Bankruptcy Court lifts the stay, upon a costly motion filed by the creditor, allowing the creditor to proceed with collections. The automatic stay prohibits garnishments of wages, levies against bank account, repossessions of cars and other vehicles and foreclosures. All Motions for Relief from Automatic Stay are heard in front of a federal judge, not a trustee.
Who is the trustee?
The trustee in a Chapter 13 case is someone appointed by the Bankruptcy Court to receive payments from the debtor, distribute those payments to the creditors according to the Chapter 13 plan and administer the bankruptcy case until it is closed. The debtor is always required to cooperate with the Chapter 13 trustee. The majority of trustees are lawyers, many practicing bankruptcy lawyers. Their fees come from the bankruptcy filing fee or are a set percentage of the money distributed in the bankruptcy.
What does a trustee do?
The trustee’s responsibility is to:
- Administer or manage the bankruptcy for the creditors.
- Make sure your unsecured creditors receive payments from your best efforts.
- Run the first meeting of creditors (called the Section 341[a] meeting).
- Collect and sell non-exempt property (Chapter 7 only) or collect and pay debt according to a repayment plan (Chapter 13).
- Get information from you as needed.
May I continue to operate my business under Chapter 13?
Yes. A self-employed person qualifying for a Chapter 13 may continue to operate his or her business.
I have incorporated my business. May I file for a Chapter 13 bankruptcy?
No. You must file a Chapter 11 bankruptcy.
I have been laid-off. Do I qualify for a Chapter 13 bankruptcy?
No. However, if you are married and your spouse has a job, you may still file a Chapter 13 bankruptcy.
Will I lose my home if I file a Chapter 13 bankruptcy?
In a Chapter 13 proceeding, even if you are behind on mortgage payments, you should not lose your home. A bankruptcy payment plan organized by the trustee will include any past-due payments and current payments are paid as they are due, If you are current on your house payments, the home will not be lost if you continue to make your payments when due.
Can you strip a second mortgage or line of credit in a Chapter 13?
If you own real estate with a second mortgage or a line of credit, chances are you can remove that second lien in a Chapter 13 bankruptcy. Because of the declining real estate market, this allowance is common nowadays. This will help to make the property more affordable by reducing the monthly payment thereby preventing foreclosure. This is especially useful now when many have had their property’s market value decrease substantially since the mortgages were obtained. To qualify, the market value of the home must be less than the first mortgage. Usually an appraisal of the property is necessary to make this determination, and the appraisal will be filed with the motion to “strip the second mortgage” at the appropriate time.
How much will my Chapter 13 plan payments be?
The law says that all debtor’s “disposable income” received during the time of the plan must be paid to the trustee. The law defines “disposable income” as all income earned or received by the debtor that is not reasonably needed for the support of the debtor and the debtor’s dependents such as your rent, mortgage payments, insurance, car payments, clothing, living expenses, utilities, etc.
How will filing under Chapter 13 impact my credit?
Typically, a Chapter 13 stays on your credit report for 7 years. This does not mean that you can’t obtain credit again for seven years. In actuality, many debtors can purchase cars and qualify for a mortgage or refinance even while in a Chapter 13 case and even obtain a credit card or unsecured bank loan as long as they can show you have been making your Chapter 13 plan payments.
What happens if you fail to follow the plan?
If for any reason, you cannot keep up with the plan payments and successfully finish your Chapter 13 plan, the trustee may modify the plan in one of the following three ways:
- If your problem looks temporary, you will be given a grace period.
- Your total monthly payment may be reduced.
- Repayment period may be extended.
However, if the court concludes there is no way you will be able to complete your plan, the judge may dismiss the Chapter 13, and you will not receive a discharge of your debts, or if the court determines that there is no way you will be able to complete your plan because conditions are totally out of your control, for example, you may suffer from a debilitating illness, then, the court might discharge your debt on the basis of hardship.
How soon after I file a Chapter 7 bankruptcy may I file a Chapter 13?
If you have previously filed a Chapter 7 case, you must wait four years from the date the Chapter 7 was filed before a Chapter 13 can be filed.
How soon after I filed a Chapter 13 may I file another Chapter 13?
You can file another Chapter 13 as long as you received a discharge under Chapter 13 more than two years previous.