What is Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy allows individuals with a regular income to reorganize their debt through a “Chapter 13 Plan” of repayment in order to repay at least a portion of their debt with their future income. The plan typically lasts three or five years. The length of your Chapter 13 Plan is dependent on your household income. Payments are made to a Chapter 13 trustee who distributes payments to creditors. Just as in Chapter 7, creditors may not start or continue collection efforts after the petition is filed.
How do Chapter 13 and Chapter 7 compare?
|Questions||Chapter 7||Chapter 13|
|What type of Bankruptcy?||Liquidation ||Reorganization|
|Who can file?||Individuals, Incorporated Businesses ||Individuals|
|Who is eligible to file?||Average household monthly income is below the means test||Anyone with secured and unsecured debt under $2,750,000.00|
|How long until Discharge?||Around 90 days||3-5 years|
|What happens to property?||The trustee may sell all nonexempt property to pay creditors||Property is kept as payments are made through the plan in amount equal to un-exempt property.|
|Can spouses file together?||Yes. But even if you are filing alone, married individuals must provide income information for their spouse regardless of if they are filing a joint petition or not in order to see if you qualify for Chapter 7.||Yes, married individuals must provide information for their spouse regardless of if they are filing a joint petition or not to properly evaluate a household financial situation|
|What type of debts cannot be discharged?||-Most tax and government debts -Divorce-related debts -Student Loans||-Most tax and government debts -Child Support and Alimony -Student Loans|
|What are the benefits?||Discharge debts faster for a quicker fresh start||-Discharges more types of debt -Allows individuals to catch up on missed mortgage, car, and propose a plan to pay non-dischargeable priority debt|
How does your income determine eligibility?
Individuals filing for bankruptcy must compete a statement of current monthly income and means test calculation, which looks at your last 6 full months of household income. The means test is only applicable to those with primarily consumer debt. The means test analyzes average household monthly gross income to determine eligibility for Chapter 7 bankruptcy proceeding or whether you can repay a portion of your debt to creditors in a Chapter 13. Anyone who is over the means test for income (which is based upon a median income for household size) has a presumption of abuse and is subject to dismissal for Chapter 7. If you do not pass the means test, you may quality for Chapter 13 instead.
What are some advantages of Chapter 13 over Chapter 7?
Many individuals who are eligible to file Chapter 7 choose to file Chapter 13. For many debtors, there are potential advantages that Chapter 13 offers versus Chapter 7. These advantages include:
- Avoid a foreclosure by allowing time to cure mortgage default;
- Pay non-dischargeable debt such as income taxes or child support over 3-5 years;
- “Cram-down” certain secured loans to value of collateral, which can reduce monthly automobile payments and avoid vehicle repossession;
- Avoid a wholly unsecured junior mortgage;
- Provide for a greater discharge of debts than in Chapter 7, including divorce property settlements and debts for willful and malicious injury to another entity or property of another entity.
How is your Chapter 13 plan payment determined?
Your Chapter 13 bankruptcy plan payment is determined by the schedule of income and expenses to determine how much disposable income is available to pay creditors. You must also pay an amount equal to the value of your un-exempt property.
Most debts are eligible for repayment under Chapter 13 including non-dischargeable debts such as student loans, back taxes, and child support payments. The remaining amount of unsecured debt not paid through the Chapter 13 plan will be discharged at the end of the bankruptcy period (aside from certain non-dischargeable debts). Therefore, there are still significant benefits to seeking Chapter 13 bankruptcy protection. If you think that Chapter 13 bankruptcy may be a good option for you, please do not hesitate to contact our office and speak with our experienced attorneys.