Is Chapter 13 Right For You
If all of your debt is unsecured and youâre eligible for a Chapter 7 discharge, Chapter 13 probably isnât right for you. But, if you have car loans or missed mortgage payments that you need to deal with, Chapter 13 might be exactly what you need.
Chapter 13 bankruptcy is right for you only if you can pay for all of your reasonable living expenses and make the plan payment without having to compromise on something.
While the plan payment is determined by your actual disposable income, the minimum amount it has to be also depends on your specific goals. Want to pay off that car loan? Your monthly plan payment has to cover at least that. Want to keep certain non-exempt personal property? Your plan payment has to cover that as well.
Chapter 13 is powerful, but you have to have the means to pay for it. If youâre $40,000 in arrears on your mortgage and making the monthly mortgage payments is still a stretch, filing a Chapter 13 to save your home is likely not a good idea.
One way to look at whether Chapter 13 is right for you is to compare your proposed plan payment to your current car payment. If your plan payment is equal to or less than what youâre currently paying for your car loans every month, you will have more money for necessities in a Chapter 13 than you have now.
Chapter 13 Bankruptcy Payment Plans Explained
Upon filing for Chapter 13 Bankruptcy, you must submit monthly payments based on a payment plan that both you and your creditor agree on. The purpose of the payment plan is to allow debtors the opportunity to retain ownership over their properties and assets while also making payments towards their debt.
Essentially, most debtors find themselves in debt due to being unable to afford their current monthly payments, and thus they risk losing their home and other assets. However, when one files for Chapter 13 Bankruptcy, the debt is restructured into more manageable monthly payments that extend over several years.
The restructuring of debt into achievable payments is the primary reason an individual would choose to file under Chapter 13 Bankruptcy.
However, if they are unable to meet the new monthly payments, debtors may have no choice but to file for Chapter 7 Bankruptcy. At this point they risk selling off property and assets to pay collectors.
Appointment Of Bankruptcy Trustee
Your case will be assigned an impartial person to handle the management and administration. This is your bankruptcy trustee who will oversee the case from beginning to end.
The Chapter 13 trustee will:
- Review the case paperwork
- Represent your case in front of the judge
- Accept debt payments from you
- Use these payments to pay your creditors according to your repayment plan
- Answer questions and set timelines
While the trustee is there to help, they represent the courts and are not necessarily on your side. A bankruptcy attorney is the only person who will watch out for your best interests during the process.
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Chapter 13 And The Cares Act
The Coronavirus Aid, Relief, and Economic Security Act, signed into law by the president on March 27, 2020, made a number of changes to bankruptcy laws designed to make the process more available to businesses and individuals economically disadvantaged by the COVID-19 pandemic.
For Chapter 13, these include excluding federal emergency relief payments due to COVID-19 from “current monthly income” and “disposable income” and allowing repayment plans to be extended to seven years. The changes apply to bankruptcies filed after the CARES Act was enacted and sunset one year later.
How Do I Know If Chapter 13 Is Right For Me
This is a pretty complicated question, but you can start by looking at some of the basics. The first question you should ask yourself is whether you have a regular income. Chapter 13 is called the wage earner bankruptcy because its success relies on the filerâs regular income. If youâre commission-based, a gig worker, or unemployed, Chapter 13 may not be right for you.
If you do have regular income, take a look at your monthly expenses. Ignore credit card payments, car loans, and other loan repayments. Do you have money left over at the end of the month if you donât have to make all the minimum payments to your creditors? If so, Chapter 13 may be right for you.
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Your Credit Will Take A Hit
Bankruptcy can have a more severe negative affect on your credit than mere missed payments. A Chapter 13 bankruptcy will appear on your credit reports as a derogatory mark for seven years from the date you filed the petition. The number of points your will drop will vary depending on your current scores and other factors relating to your financial situation. For more on this, check out our article on how to build credit after a bankruptcy.
Restrictions During Chapter 13 Bankruptcy
Chapter 13 bankruptcy carries with it a few restrictions which are not present in Chapter 7 bankruptcy, the monthly plan payment being the most obvious. In addition, you will not be allowed to incur any more debt without court approval. As in any situation where you still hold liens against major assets, you will have to maintain insurance coverage on those assets.
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How Are Chapter 7 Bankruptcy And Chapter 13 Bankruptcy Different
The main difference between Chapter 7 and Chapter 13 Bankruptcy is how debt is repaid. With Chapter 13, you will repay all or some of your debts under a court-mandated repayment plan.
Chapter 7 bankruptcy does not put you on a repayment plan eligible debts are immediately wiped out. However, it is only an option if your household’s income is less than your state’s median for a household of similar size.
What Happens If A Chapter 13 Bankruptcy Case Is Dismissed
If a Chapter 13 bankruptcy case is dismissed, several things can happen. First, your automatic stay put in place when you first filed is no longer in force. That means creditors can once again take action to collect a debt, which can include harassing phone calls and letters, wage garnishment, foreclosures, repossessions, and debt collection lawsuits. You lose your protection from creditors. Next, you may also face new collection activity for any debts that fall into default now that werent before. And depending on your attorney and how far along you are in the bankruptcy process, you will still typically have to pay your attorneys fees even though you wont achieve a completed bankruptcy or discharge.
To make sure your bankruptcy is successful and your case doesnt get dismissed, it is very important to follow all the rules of the bankruptcy process, including filing the appropriate paperwork, showing up for court hearings, and meeting all the obligations under your Chapter 13 repayment plan.
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Chapter 7 Is Better If
you only have unsecured debt, like credit card debt, medical bills, balances owed after a repossession, personal loans, etc.,
you donât have a regular income or not enough income to cover your living expenses like housing and food,
you canât afford to hire a bankruptcy lawyer to help you with your bankruptcy case,
you donât have any non-dischargeable debts like alimony or child support or youâre current with your payments on these obligation,
youâre not able to commit to a repayment plan for at least the next 3 years.
What If I Cant Make The Plan Payments
Life happens, and we understand that. If youre no longer able to make your Chapter 13 payments according to the plan, its important to contact our office immediately. We may be able to do a plan modification in order to lower your payments. If that does not solve the problem conversion of your case to a Chapter 7 bankruptcy or dismissal may be in order.
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The Cost Of Applying For Bankruptcy Is Often Prohibitive But There Is A Gamut Of Options To Explore Having An Apt Knowledge Of The Difference Between Chapter 7 And Chapter 13 Bankruptcy Can Protect You From Making Mistakes
Imagine having just $100 left in your checking account with $300 in utility bills due a week before you get paid next. You realize that filing bankruptcy may be a good option for you, but whats the cost? Now imagine meeting with a bankruptcy attorney and hearing that the cost of attorney fees is $1,500, while the filing fee is $350.
The question on your mind here will undoubtedly be How can I afford to file for bankruptcy? I cant even afford my utility bill.
This is a prominent question many people have before filing bankruptcy. The cost of filing for bankruptcy can be pretty prohibitive, but lets cover some tricks to make this a reality.
Chapter 7 vs. Chapter 13 Bankruptcy and Costs
Seeking a bankruptcy discharge is often the last option folks utilize when facing financial hardship. There are numerous undesirable impacts and potentially other demerits to consider before you apply for a discharge. There are also numerous types of bankruptcy, but the most common are Chapter 7 bankruptcy and Chapter 13 bankruptcy. We will cover both of these in detail.
Chapter 7 Bankruptcy Costs for Beginners
Many people file a Chapter 7 bankruptcy because it is less expensive and fast. You can receive your bankruptcy discharge in as little as 120 days. Furthermore, the main costs are the bankruptcy attorney fees and the bankruptcy filing fee.
The Chapter 7 bankruptcy filing fee is $338.
Pro Se Chapter 7 Bankruptcy Filing
Chapter 13 Bankruptcy Costs for Beginners
How Much Youll Owe And The Length Of Plan
Of course, with certain types of debt, creditors and mortgage lenders receive 100% of the debt that you owe. Other forms of debt may require only partial repayment, or in some cases, no repayment at all. So, ultimately, the amount a debtor must pay in their Chapter 13 Bankruptcy payments depends on the type of debts they owe. Also, their monthly income comes into play.
The following types of debt must be paid entirely:
- State and federal income taxes
- Money owed to Employee Benefit Funds
- Back alimony and child support
- Wages, salaries, and commissions you owe to employees
- Mortgages and mortgage defaults
Furthermore, the length of ones payment plan depends on their income level. If your monthly income is more than the median monthly income in your state, the repayment plan must last at least five years. If your income is lower, you must make payments over the course of three years.
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Filing Chapter 13 Bankruptcy
Chapter 13 allows debtors to repay all, or a significant portion, of their debts in 3-5 years under a court-ordered plan. The most common debts discharged in a Chapter 13 proceeding are medical bills, credit card debt and personal loans.
If the court accepts your repayment plan, creditors are forbidden to continue collection efforts. You also should get relief from collection agencies and their barrage of phone calls and letters.
To be clear: Chapter 13 is not what people typically think of when they think bankruptcy. It isnt wiping the slate clean and starting all over again. Unsecured debts, like alimony, child support, student loans and taxes must be paid in full and payments on things like house and car, must be kept current during your repayment period.
Chapter 13 as a repayment plan that a bankruptcy court trustee administers. Typically, a petitioners attorney creates the plan that allows payment of key debts over several years. At the end of that period, unsecured debts that remain unpaid are discharged.
Why Is Chapter 13 Probably A Bad Idea
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In a Nutshell
An unsuccessful Chapter 13 can leave you in worse financial shape. It costs more than Chapter 7 and your case is less likely to be successful.
Written byAttorney Jonathan Petts.
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Myth: Chapter 13 Usually Will Improve Your Budgeting Skills
Another argument made in favor of Chapter 13 is that it teaches you to live within a budget.
âWith a Chapter 7, wham bam itâs over, and theyâre back to the same old thing, the bad habits that got them in trouble to begin with,â says Arthur Ray, a bankruptcy attorney in Memphis. By contrast, says Ray, âa Chapter 13 shows people how to live without buying things for that 60-month plan.â
Thatâs definitely true for the 33% of cases where Debtors actually complete their plans. But, as we know, most debtors donât complete their 3-5 year plan.
For those cases that fail, there is no lasting debt relief and most likely no lasting budgeting improvement either.
How To Choose A Bankruptcy Attorney
Are you facing a foreclosure, or the repossession of your assets? If so, you are likely being harassed by creditors, feeling overwhelmed by the amount of unsecured debt you carry, and worried about protecting any co-signers you may have on loans. But where do you begin the process of turning your financial situation around?
If Chapter 13 Bankruptcy is something you are considering, there are a few key things you should think about when selecting a Bankruptcy Attorney. Choose an attorney you trust, and one that works out of compassion and attentiveness. Find someone who wants to help you get back on your feet, and isnt in it for what they stand to gain.
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Is Chapter 13 A Loan
Chapter 13 personal bankruptcy is not a loan. It is a Federal Bankruptcy Court sanctioned debt reorganization plan. The powerful laws that govern chapter 13 can help save homes, stop repossessions, and reduce unsecured debts such as credit cards and medical bills to pennies on the dollar. Most debt balances are wiped out upon completion of a chapter 13 plan.
Loans From Retirement Plans
If you took out a loan from your 401k or other retirement plan and are having difficulty paying it back, you can include that 401k loan in your list of debts. Youll be required to make payments on the 401k loan as if it were an unsecured debt, and whatever amount of debt is left over after you have completed your payment plan will be discharged. This is very different from a Chapter 7 bankruptcy, where retirement plan loans cannot be discharged.
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Chapter 13 Vs Chapter 11
Chapter 11 bankruptcy is another plan in which debt is restructured and paid back over time. Although it is available to individuals, couples, and businesses, it’s filed most frequently by businesses because it is expensive and complicated.
Chapter 13 gives filers who make too much money to be considered for Chapter 7 an easier alternative to Chapter 11. Filing for Chapter 13 bankruptcy may also protect cosigners of the debtor’s loans from being held responsible for them.
What You Need To Know About Payment In A Chapter 13 Plan
A Chapter 13 payment plan will span three to five years, depending on how the monthly income compares to the state median income. Although you are not required to liquidate assets in a wage earner plan case, you can if you find that more appropriate than cash-flowing all the plan payments out of your income.
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Chapter 13 Bankruptcy Can Protect Non
If property is not exempt under federal or state law, a Chapter 7 bankruptcy trustee is obligated to recover its value for the benefit of creditors.
In a Chapter 13 case, non-exempt property can be retained as long as plan payments offset the value of that property.
If a single person had a second car with equity of $2,000, it would exceed the exemption and not be protected. Under Chapter 13, as long as long as plan payments totaled at least $2,000, the car could be retained, although it was not exempt.
Treatment Of Property With Loans
Loans secured by property must be paid in full each month in order to keep the property unless a modification to the loan is approved by the lender. If the monthly payments for a secured debt are not paid in full during the course of the payment plan or there are still missed payments that were not made up after the payment plan has been completed, the lender has the right to seize the property or foreclose on it. Recall that missed payments are considered a priority debt regarding your payment plan and must be paid back to successfully complete the plan.
The one note to keep in mind is that while payments must be made, the loan does not need to be paid in full by the end of the payment payment plan if the loan term is longer than the payment plan, such as with a home mortgage.
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What Is A Chapter 13 Bankruptcy Discharge
After you follow a three- or five-year repayment plan under Chapter 13 you will be able to have certain remaining debts erased. Unsecured debts, such as credit card balances and medical debt are eligible for discharge under Chapter 13.
You must complete a financial counseling course to be eligible for discharge and must not have applied for a prior Chapter 13 bankruptcy discharge within the past two years.
Who Is Eligible For Chapter 13 Bankruptcy
Anyone with regular income can file for Chapter 13 bankruptcy, as long as the total debt is within the threshold. The individuals income level helps determine the timeline of the repayment plan.
If your income exceeds the median level in your state, youll repay your debts over five years. If your income is below the median, repayment will take place over three years.
Here are some things to consider if you are thinking about filing for Chapter 13.
- Regular income is required.
- You must provide up-to-date tax returns and payments.
- Unsecured debts, like those from unsecured credit cards and personal loans, cant exceed $394,725. Secured debt for example, from a mortgage or car loan cant exceed $1,184,200.
- You may not qualify if youve had a bankruptcy dismissed within 180 days for a failure to appear in or comply with the bankruptcy court.
- To receive a discharge at the end of a Chapter 13 repayment plan, you cant have received a discharge from a Chapter 13 bankruptcy within the previous two years or from a Chapter 7, Chapter 11 and Chapter 12 within the previous four years.
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