What is Chapter 13
Chapter 13 is a way for you to keep your property on your terms. This is accomplished by restructuring your agreements with your creditors. A Chapter 13 Bankruptcy creates a payment plan that fits within your budget. It allows you to take control of your financial situation and determine how your creditors are repaid. No matter how you found yourself in your financial crisis, whether it is unexpected events or bad choices, a Chapter 13 gives you the ability to turn it all around.
If you are behind on your home, missed a car payment, owe the IRS, or have a garnishment, then a Chapter 13 may be right for you.
How much are my payments going to be?
Your Chapter 13 plan payments are going to be based on two factors:
(1) What you want to restructure and
(2) How much money you make.
What you pay in your Bankruptcy depends on your specific circumstances. People typically restructure their vehicles, mortgage arrears, IRS, property taxes and/or general unsecured debt (medical bills, credit cards, etc.)
Your specific monthly payment amount is determined by several formulas and factors that you and your attorney will go over together. This payment is usually much lower than what you would be required to pay outside of Bankruptcy.
Foreclosure / Keeping my Home
Foreclosure is a scary process and in many cases people feel as if they are powerless to do anything about it. However, whether you want to keep your home or just want time to move out, a Chapter 13 Bankruptcy may be something for you to consider.
A Chapter 13 Bankruptcy can help you keep your home by stopping the foreclosure in its tracks and allowing you to repay the past-due amounts over a 3 to 5 year period. For example, if you owe $8,000 in past due mortgage payments, your mortgage company would require you to pay it back in 3 months, which would be an additional $2,667. However, in a Chapter 13 Bankruptcy, you could repay that same $8,000.00 at around $133.00 per month.
Vehicles – Lowering your vehicle payment
Paying for your vehicle through a Chapter 13 can save you a lot of money because a Chapter 13 allows you to change the terms of the original note.
In almost every case the interest rate can be lowered to 4.25 percent. On a $15,000 car note, at 18 percent interest, with a payment term of 60 months, you would be looking at a payment of $475 per month outside of bankruptcy. If you put that same car in a Chapter 13 bankruptcy, you would pay around $303 per month, saving you $172 each month – with a total savings of $7,500.00.
If your car was purchased more than 910 days ago, then you could be eligible for what is called a “cram-down”. This allows you to repay the actual value of the vehicle, not what you owe on it. So, if you have a car that is actually worth $7,500.00 but you owe $12,000, then you would pay the $7,500 in your Chapter 13 bankruptcy.
In both of these examples, at the end of the Chapter 13 bankruptcy, you will own your vehicle free and clear.
IRS – paying back at 0% interest
If We can give anyone a piece of advice,try not to get into debt with the IRS. However, if you are already there take a deep breath because there is a way out. Outside of Bankruptcy, the IRS can be very aggressive and make your life extremely difficult. However, in Bankruptcy, the IRS must abide by certain bankruptcy rules that can help you out.
In some cases, depending on how old the IRS debt is and when you filed your tax return, you may not have to repay any of that debt. So, lets say you owe $10,000 from a tax return you filed 5 years ago. In a lot of cases, you may be able to discharge that debt (essentially have it erased) without having to repay a single cent to the IRS. Again, whether you have to pay the IRS is going to depend on your specific circumstances, so consult with a bankruptcy lawyer to get a dischargeability analysis performed.
If you have to repay the IRS, you still can get a lot of benefit by repaying that debt in a Chapter 13 bankruptcy. Lets take the example above but lets assume that you were not allowed to discharge the debt. Instead, you would repay that debt over 5 years at 0% interest ($167 per month). In addition, as long as you completed your Chapter 13 bankruptcy, you would not incur additional penalties or interest while repaying the debt.
Credit Cards, Judgments,
Medical Bills, Etc.
Generally, you will not be required to repay any of your unsecured debt and that debt will be forgiven at the conclusion of your bankruptcy. Unsecured debt in most cases includes credit cards, medical bills, loans, and judgments.
In order to determine if you are required to repay some of your unsecured debt a financial analysis of your income, assets and expenses will need to be completed. Your financial analysis includes completing the Form B22C (also known as the Statement of Currently Monthly Income), passing a disposable income test and best interest of creditors test.
Even if you are required to repay some of your unsecured debt, it will be repaid at 0% interest and will be less than what you would have to pay outside of bankruptcy.
Will the Court Approve my Bankruptcy?
Everyone has the right to file bankruptcy. The starting point to having a successful bankruptcy is choosing the right chapter. In a Chapter 13 bankruptcy you must obtain an approval of a plan with the court and your creditors. This process is called confirmation and typically occurs within 3-6 months after filing your Chapter 13 bankruptcy. There are several roadblocks that could prevent you from having your plan confirmed, however, most of these are easily remedied. The most common roadblock to confirmation of your plan is what is known as a feasibility objection. This simply means that you must be able to establish that you have the income to meet all of your necessary expenses. This is accomplished by filing a budget with the court showing how you will make your plan payment and other expenses.
Student Loan Debt
Student loan debt has been steadily increasing. Recent studies show that 1 in 5 households are burdened by student loan debt. Student loan creditors are afforded special rights that allow them to more aggressively attempt to collect debt. They have the ability to garnish wages, take your tax refund, and significantly diminish your credit rating. The filing of Chapter 13 bankruptcy can stop this from occurring. It can also give you breathing room by deferring your student loan payments for 3-5 years.