WHY FILE A CHAPTER 13 BANKRUPTCY?

A Chapter 13 is generally well suited for someone who has regular and stable income who wishes to reorganize their debts. A Chapter 13 bankruptcy is commonly known as the personal reorganization chapter because the person or couple filing the Chapter 13 bankruptcy (called the Debtor) proposes a plan which (1) restructures their debts by categorizing and consolidating all similar debts (such as secured debts, general unsecured debts, etc…), (2) eliminates or reduces their interest rates and possibly principal balances owed, and (3) calls for only a single payment (for nearly all creditors) to be paid monthly (called “plan payments”) which is often far less than what the Debtor was paying before filing the Chapter 13 bankruptcy. A Debtor’s plan payment is paid to a single person who represents all of a Debtors creditors (this person is called a Trustee) who will then distribute all plan payments received to the Debtor’s creditors in accordance with the agreed terms of the Debtor’s Chapter 13 plan. Because of the restructuring of debt, a Chapter 13 bankruptcy case typically lasts anywhere from three to five years. The specific length of a chapter 13 case is dependent on many factors, and will always be discussed and determined before a chapter 13 case is ever filed. 

CHAPTER 13 VERSUS CHAPTER 7, AND THE PRIMARY DIFFERENCES

Both a Chapter 7 and Chapter 13 bankruptcy begin and end in relatively the same way. The filing (ie. beginning) of either a Chapter 7 or Chapter 13 bankruptcy will immediately invoke special rights and protections afforded to a Debtor under the law, which will effectively limit or end collection attempts (wage garnishments, foreclosures, bank account levies, etc…) and most importantly creditor harassment. Furthermore, both a Chapter 7 and Chapter 13 bankruptcy, upon successful completion (ie. the end), will result in the total discharge of all of a Debtor’s dischargeable debts. The differences between the two chapters can be found in between the beginning and the end. An initial difference between the two chapters is the length… where a Chapter 7 case typically lasts 4-5 months, and a Chapter 13 case typically lasts 3-5 years (36-60 months). Another major difference is repayments… where a Chapter 7 does not require monthly bankruptcy payments, a Chapter 13 does require monthly plan payments for the life of the plan. One more primary difference between the two chapters is a Chapter 13 bankruptcy Debtor may be able to strip junior liens from a primary residence (ie. compel a second mortgage/equity line lender to “un-record” their secured interest in the Debtor’s primary residence). This ability to “strip” a lien is simply not available in Chapter 7 bankruptcy cases. There are obviously other differences between the two chapters, these are simply the most significant ones. To find out more about the differences between a Chapter 7 and Chapter 13 Bankruptcy, please feel free to contact us.

THE EFFECT OF A CHAPTER 13

The biggest benefits of any bankruptcy filing is what happens at the successful completion of the case…. the discharge of debts.  Like a chapter 7 bankruptcy discharge, a chapter 13 bankruptcy discharge eliminates all unpaid and dischargeable debts which were incurred prior to filing bankruptcy. In addition to the discharge of debts, given the restructuring effect of a Chapter 13 bankruptcy, upon the successful completion of a Chapter 13 Bankruptcy case, a Debtor should also be (1) current with their home mortgage payments (if they had owed back/missed payments), (2) current with any income taxes owed, and (3) have paid off any vehicle loan(s) owed prior to filing.

KEEPING ASSETS IN A CHAPTER 13

Unlike a Chapter 7 Debtor, a Chapter 13 Debtor CAN typically keep all of their assets, even when their assets exceed the amount that can be exempted (ie. protected) by them (for more information about exemptions click here to read more about “Keeping Your Assets”. This is because a Chapter 13 is a restructuring of debts, which focuses on the repayment of debts to certain creditors, and not the liquidation (or sale) of assets as the way creditors receive repayment). In chapter 13 cases, the unexempt amount of a Debtor’s asset(s) is included in the Debtor’s Chapter 13 plan payment, as spread out over the life of the Debtor’s chapter 13 plan. This “extra” portion a Chapter 13  Debtor pays for the unexempt value of an asset must go to repay the Debtor’s unsecured creditors. As an example, if a Chapter 13 Debtor has $6,000 in assets that the Debtor was not able to exempt (ie. not able to protect), then the Debtor would have to repay $6,000.00 to unsecured creditors over the life of their chapter 13 plan. In this example, if the Debtor’s Chapter 13 plan length was 60 months (5 years), then this Debtor would be paying approximately $100 per month more because of this unexempt asset amount.