25 Aug Eleven Things to Know About Chapter 13 Bankruptcy and How it Works
Stopping a foreclosure – even after the sale date. Paying past due mortgage or car loan payments over time even when the lender will not work with you. Keeping assets you would give up in a Chapter 7 bankruptcy. These are all reasons why a consumer would consider filing a Chapter 13 bankruptcy. Chapter 13 offers a way to catch up on past due amounts and stretch payments out over time to give you breathing room to get back on track.
Chapter 7 For consumers, there are two primary bankruptcy options to consider. A Chapter 7 bankruptcy is what many people think of when they think “bankruptcy.” In basic terms, a Chapter 7 means that you either sell or pay the value of all of your non-exempt assets to pay off your creditors. “Exempt” assets are the things you have that the bankruptcy laws allow you to keep for your basic living needs.
Chapter 13 A Chapter 13 bankruptcy is slightly more complex. Chapter 13 is often known as “wage earner” bankruptcy because it involves monthly payments made over the course of a 3-to-5-year payment plan. The payments are made to a Chapter 13 “trustee,” who is a lawyer that administers a Chapter 13 plan in accordance with the bankruptcy laws. Among other things, the trustee gathers the monthly payments and distributes them to the appropriate creditors, taking a small percentage of payments as a fee.
Because you are required to make monthly payments in a Chapter 13 bankruptcy, you must have enough consistent income to cover the payments. Once you successfully make all monthly payments required under your plan (explained in more detail below), the bankruptcy court will “discharge” (forgive) any remaining debt.
2. How does the “automatic stay” affect my bankruptcy?
No discussion of bankruptcy is complete without mentioning the “automatic stay.” Once you file for bankruptcy, whether under Chapter 7 or Chapter 13, an automatic stay goes into effect that stops all actions by your creditors to collect debts from you. This means that creditors cannot call you, continue a foreclosure action, repossess a car, or do anything else in an attempt to collect their debt. Courts interpret “attempt to collect” very broadly, so filing for bankruptcy generally means that every action against you will stop. In a Chapter 13, this means that you get breathing room that allows you to keep your home or car while you catch up on payments.
When does it make sense to file a Chapter 13?
3. To save your home from foreclosure
The most common reason that people file for Chapter 13 is to save their home from foreclosure (since the automatic stay stops the foreclosure while you catch up on payments). Click over to our post about the foreclosure process in North Carolina to learn more.
4. If you are behind on car payments, mortgage payments, or taxes
If you are behind on your mortgage or car payments you may want to consider filing a Chapter 13. In this scenario, a Chapter 13 would allow you to make up your past-due payments over the course of the plan. Similarly, if you have substantial back-taxes, a Chapter 13 will allow you to pay them off over the course of the plan rather than paying them all off at once.
5. If your income is stable but you have too much debt
You may also want to consider a Chapter 13 if you have enough income to pay your reasonable living expenses and still have money left over. It doesn’t matter if your income comes from a job or another (legal) source, so long as it is reasonably stable. The important thing is that you can pay something to your creditors over the course of the plan, as well as make the payments on the assets you want to keep. This is in part because you may not qualify to file a Chapter 7 if your income is above a certain level.
6. To keep assets you would have to give up in a Chapter 7
If you have substantial non-exempt assets that you want to keep (including equity in a home), a Chapter 13 may be better than a Chapter 7 because it will allow you to pay the value of your non-exempt assets over time. In a Chapter 13 bankruptcy, your unsecured creditors must receive as much as they would receive in a Chapter 7, meaning the amount they would get in theory if you sold all of your non-exempt assets to pay them. A Chapter 13 bankruptcy allows you to pay that amount in through the plan over 3 to 5 years.
How does a Chapter 13 affect my debts?
Successfully completing a Chapter 13 bankruptcy can turn your financial life around and get you back on the track to financial success. While we can only accurately tell you how much you will need to pay your creditors in a Chapter 13 plan after discussing your financial situation in detail, what must be paid generally depends on the type of debt.
A Chapter 13 plan generally must provide for payment of secured debts, particular categories of taxes, and domestic support obligations. The amount that gets paid to remaining unsecured creditors can vary from as little as 0% to as much as 100% depending on your situation.
7. How Chapter 13 treats secured debt
Secured debt is debt that is “secured” by collateral, such as a home or car. That means that the lender can take the collateral from you and force a sale if you do not successfully pay off your loan.
Mortgage on a primary residence – Mortgages must still be paid if you file for a Chapter 13 bankruptcy. Unfortunately, the bankruptcy laws do not allow mortgages on a primary residence to be modified, which means that you are still required to pay them in full. However, a Chapter 13 bankruptcy allows you to make up any arrearages on your mortgage over the course of the plan. The plan will typically include both your normal monthly payment as well as the amount needed each month to make up the complete past-due balance. When you finish your plan, you will be caught up on your payments and will simply need to continue to make your normal mortgage payments as they come due.
Second Mortgages – If you have a second mortgage and you are under-water on your first mortgage (meaning the mortgage exceeds the value of the home), a Chapter 13 may be able to get rid of your second mortgage through the bankruptcy plan. This is called “lien stripping.” Because the house is worth less than your first mortgage, the bankruptcy court effectively converts your second mortgage into an unsecured debt. You may still have to pay something towards your second mortgage, but it will be through the plan and it won’t be treated any differently than any other unsecured debt (like a credit card).
Vehicle Loans – Car loans are treated in one of two ways in a Chapter 13 bankruptcy, depending on the age of the loan. If you bought the vehicle within the last 2 ½ years, you can reduce the interest on the loan to 5.25% and stretch your payments out over the life of the plan (usually 5 years). If you bought the vehicle more than 2 ½ years ago you can “cram-down” the loan to the actual value of the car and pay that amount through the plan. In other words, if you owed $10,000 on a car that was only worth $5,000, you would only need to pay $5,000 (the value of the car) over the course of the plan. A Chapter 13 plan typically pays off your vehicle entirely over the course of the plan so that you own the car free and clear at the end.
8. How Chapter 13 treats tax debts and domestic support obligations
In a Chapter 13 bankruptcy, you must pay tax debts from the three years prior to filing, as well as any tax debts for which the government has filed a lien against your property. The plan will allow you to spread the payments out over time. Some tax debts can be discharged in a Chapter 13, but this requires an individual evaluation of your situation.
With domestic support obligations, including child support and alimony, you must keep your payments current in order to remain in a Chapter 13 plan. You will not receive any reduction in child support or alimony payments through the bankruptcy.
9. How attorneys’ fees are paid
The majority of the attorneys’ fees associated with a Chapter 13 bankruptcy are paid over time through the plan. We generally require payment of $500 prior to filing, with the remaining amount, usually $4,000 (the presumptive fee set by the Bankruptcy Court) ,paid in over time through the Chapter 13 plan.
10. How your unsecured debt is treated
The amount you are required to pay toward other unsecured debts (including credit cards, medical bills, etc.) is determined by:
(1) The amount of your income that is available to pay those debts after you’ve paid your ongoing household expenses and the debts discussed above that you’re required to pay in the plan.
(2) The amount of non-exempt equity you have in property that you wish to keep. By equity, we mean the value of the property minus the amount of any lien on the property. Under the bankruptcy code and North Carolina, you can keep certain property up to certain values (for example, $5,000 of personal property, among other things). These are called “exemptions” because the exempted property is not affected at all by the bankruptcy. If you want to keep property that you cannot exempt, you must pay the value of your equity in the property into the Chapter 13 plan, and it will be distributed to your other creditors.
The idea behind these requirements is that in exchange for getting the benefits of bankruptcy, you must pay to your creditors: (1) all of your income that isn’t going toward necessities and (2) the value of all property that isn’t deemed necessary. Once you’ve made your payments over the required length of time (usually 5 years) then the rest of the other debts are discharged (forgiven).
11. How student loans are treated
Unfortunately, filing bankruptcy (either under Chapter 7 or Chapter 13) in most cases will not get rid of any student loans you may have. You will not have to pay while you are in the Chapter 13, but you will need to continue payments as normal after you have completed your plan.
How can we help you in Chapter 13?
A Chapter 13 bankruptcy is a long and complicated process, but we will be with you every step of the way. We want to design a plan that will work for you, so we make every effort to understand your unique financial circumstances and your long term goals.