Chapter 13 Bankruptcy

A person may file a Chapter 13 bankruptcy rather than a Chapter 7 bankruptcy case for a variety of reasons. Several prime examples are:

• A person may make too much money to qualify for Chapter 7 bankruptcy;
• A person may have too much non-exempt property that would be lost to the trustee in a Chapter 7 bankruptcy case;
• To pay off taxes that would not be discharged in a Chapter 7;
• To stop a foreclosure sale and get caught up on mortgage payments;
• To strip off liens on real estate that are wholly unsecured.

Whatever the reasons, filing a Chapter 13 bankruptcy case can be a very complicated undertaking. Chapter 13 allows a person to reorganize their debt into a payment plan that fits their budget and typically lasts three to five years. Rather than paying dozens of different creditors every month, you will send in one payment to a court-appointed trustee, who then disburses payments to creditors. The monthly payment is your disposable income, which is your monthly income minus necessary living expenses.

The Process

As with Chapter 7 bankruptcy, the process begins with you and I meeting in person to determine if Chapter 13 bankruptcy is best for you, and if you qualify. There are limits to how much debt one can have in Chapter 13, and other restrictions to go over as well. Once we determine you are eligible, I’ll collect the necessary documentation from you to prepare the paperwork, such as tax returns, pay stubs, bank statements, and bills. Once I’ve completed the papers that will be filed with the court, we’ll meet to go over each page to ensure that it is correct. Once I’m satisfied that everything is correct, I’ll file your case with the court. As in Chapter 7 bankruptcy, there is a meeting with the trustee about a month later, but the role of Chapter 13 bankruptcy trustee is different than that of the Chapter 7 trustee. Whereas in a Chapter 7 case the trustee is trying to find assets to liquidate, in a Chapter 13 case you will generally keep all of your property – generally only your income goes to your creditors, not your property. The role of the Chapter 13 trustee is to consider your Plan (see below) and act as a gatekeeper with the court. If the trustee feels that you don’t have sufficient income to fund the Plan, or are not paying off necessary debts or following a list of other rules, he can file an objection with the court. If we agree that there was good cause behind the objection, a Plan modification can be made to satisfy the trustee’s concerns. If we don’t agree, a court hearing is set for a judge to decide. Once the Chapter 13 bankruptcy Plan is approved, monthly payments must be made to the trustee for a period of time not exceeding sixty months. Once the payments are completed, you will receive your Chapter 13 discharge.

The Plan

Within fourteen days after filing your petitions and schedules, a Plan must be filed that sets forth the details of how you intend to pay off all or some of your creditors over the following three to five years. For a Chapter 13 bankruptcy Plan to be approved, it must generally follow certain rules, such as:

• Fully paying priority claims, which include most taxes, the costs of the bankruptcy proceeding and domestic support obligations, as well as several other more rare examples;
• Pay off the arrearages on secured property that you want to keep, typically houses or cars;
• Pay your creditors at least as much as they would get in a Chapter 7 bankruptcy case;
• Show that all disposable income is going into the Plan.

Once the Plan is approved you must complete the payment dictated by that Plan. Only after the completion of payments is a discharge issued.

Stripping Off Liens

One of the big advantages of a Chapter 13 bankruptcy case is the ability to strip off liens on real estate. Unfortunately, in today’s economy there are many people who are upside-down in the value of their home. If you house is worth less than the value of your first mortgage, another loan on top of that may be “stripped” off as being wholly unsecured. For example, if you own a piece of property that is worth $100,000, with a first mortgage of $110,000 and a second mortgage of $75,000, the second mortgage is wholly unsecured. A separate court case within the bankruptcy case may be filed called an Adversary Proceeding, and within that case you can get a judge’s order stating that upon the completion of your Chapter 13 case and the awarding of a discharge, the second mortgage is deemed stripped off and papers are filed in your local county land records to release that lien. Whatever the reasons for filing a Chapter 13, understand that it is a very complicated matter and should not be undertaken lightly. There are even more pitfalls than in a Chapter 7 case, and more hoops to jump through. In addition to the dozens of pages of documents that must be filed in any bankruptcy case, if your Plan is not done correctly, the trustee will object, and you will end up in court over and over again trying to figure out what rules you did not follow. A free consultation from the Law Offices of Fisher – Sandler LLC is a good place to start any evaluation of your situation to decide if Chapter 13 bankruptcy is right for you.