Chapter 13

Chapter 13 bankruptcy is a “reorganization” bankruptcy rather than a complete liquidation of debt as in a Chapter 7. A Chapter 13 is, basically, a payment plan enforced by the Federal Bankruptcy Court upon all of your creditors, whether the debt is a “dischargeable” debt like a credit card or “non-dischargeable” debt like a child support arrearage or recent income taxes owed. Contrary to popular belief, you are not required to pay back 100% of what you owe to your creditors in a Chapter 13.

The Chapter 13 Plan may be 36-60 months long. Although there is no income-based eligibility standard in a Chapter 13, the same income-based “means test” that determines Chapter 7 bankruptcy eligibility also determines whether you may have a 36-month Plan. The Chapter 13 Plan is devised by you and your attorneys and proposed to the court for its and for creditors’ approval. What you pay in a Chapter 13 Plan is whatever net income you have in your household each month, after basic household expenses, such as food and gas and utilities are taken into account. For instance, if you have $1500 in net household income each month and $1200 in household expenses, your Plan payment would be $300 every month.

The approval process for the Chapter 13 Plan is roughly 5-6 months long and will require you to attend, typically, at least two hearings at the Bankruptcy Court. Once the Plan is approved by the Trustee who is assigned to your case by the Court when it is filed, you are off and running, your only obligations being a timely monthly payment and good communication with your attorney, should your income decrease or expenses increase at any time.

Chapter 13 is the form of bankruptcy available to you if you are not qualified to file a Chapter 7 bankruptcy.  However, there are many good reasons to file a Chapter 13 even if you are qualified for Chapter 7.

First, there is no liquidation of your personal assets in a Chapter 13. If you have property that would be seized and sold off in a Chapter 7, a Chapter 13 may be your best option if that property is important to you.

For this same reason, if you are running a small business, a Chapter 13 bankruptcy may be a wiser option so that you do not risk losing your business in a Chapter 7, where the Trustee has the right, under certain circumstances, to seize and wind down your business.

Second, in a Chapter 7 bankruptcy, you either keep or surrender your real estate as-is, with all mortgages intact. In a Chapter 13, we can pursue a mechanism called a “lien-strip,” which will remove and discharge your liability to make payments on a second mortgage, if your house is worth less in fair market value than you owe on a first mortgage.

We can also, under certain circumstances, cram down the payment you make for other secured debts, such as a car payment, so that you pay in full in the Chapter 13 plan only what the property security it as actually worth. If your car, for example, was purchased more than 3 years ago and has more than 75,000 miles on it, you will pay off your loan in a Chapter 13 only to the extent of the car’s real value.

Tax debts and other non-dischargeable debts, with the exception of student loans, can also be paid off through a Chapter 13 Plan at 0% interest—a few percent better than the IRS will give you in most of its repayment plans.

A Chapter 13 can also be dismissed at any time if it is no longer working for you, or it can be converted to a Chapter 7 later on, if your economic circumstances decline. It is a highly flexible process.

Chapter 13 Bankruptcy, best of all, requires virtually no negotiation with your creditors for it work. It is one of the most effective and most efficient processes for dealing with personal debt left in the American legal system. Debts discharged through bankruptcy carry no taxable penalty.

A Chapter 13 Bankruptcy is a complicated process, and it is essential that you retain an experienced bankruptcy attorney to assist you with it.

If you are a southeast Michigan resident and are considering filing for bankruptcy, please contact me at (866) 674-2317 or john@hillalaw.com to schedule a free, initial consultation.