What is Chapter 13 Bankruptcy?
A chapter 13 bankruptcy is also called a wage-earners plan or reorganization. A Chapter 13 is used where you need to stop a foreclosure, reinstate a driver’s license, or if you earn too much money to qualify for a Chapter 7 bankruptcy. Perhaps you want to make your best efforts to pay off your creditors. If so, then Chapter 13 bankruptcy may be for you.
A Chapter 13 Bankruptcy is much more complicated than a Chapter 7. In order to enter a Chapter 13 bankruptcy, you have to propose a plan to the Court that states how you are going to reorganize your finances. If the Court believes you can make the plan work, and you have proposed the plan in good faith, the plan will be confirmed and your bankruptcy will be mostly complete.
Consider companies like K-Mart, WorldCom, American Airlines. They have all entered into a Chapter 11 bankruptcy. Chapter 13 is a lot like a Chapter 11 but on a more personal level instead of a corporate level.
The critical issue to the Chapter 13 plan is that a payment must be made. You will make your first plan payment within 30 days of filing the plan. The monthly payment is critical to a Chapter 13 plan. In order to reorganize you contribute any existing disposable income to the plan which is then distributed by the Chapter 13 trustee to the creditors.
Disposable income is defined as money which is available after all the base expenses have been paid.
What are the advantages of a Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy is one of the best financial tools available to prevent serious financial trouble before it starts. With a Chapter 13, it is possible to remove 2nd mortgages, strip away debt that cannot be sustained, lower car payments, adjust interest rates on debt you choose to keep, and payoff other debt entirely.
Chapter 13 lets you rearrange your finances, repay a portion of your debts and put yourself back on your financial feet. The plan will last from three to five years. It takes time, but it can be an extremely successful way to alter your financial course and get back on track.
You would probably be a good candidate for a Chapter 13 bankruptcy if:
- You have been trying to pay back your debts, but simply cannot afford the ongoing minimum payments and need an extended repayment period.
- You have a high amount of unsecured debt with rising interest rates.
- You have a pending foreclosure and want to stop the sale.
- You have one or more liens on your property and your property is worth less than the first lien on your property.
Just how powerful a tool is Chapter 13 bankruptcy?
Extremely, you can use it to stop a house foreclosure, catch up on mortgage payments, pay off tax liability without accruing penalties and interest. You can actually lower your car payment and pay it off over the course of the plan. Even if you pay off all your credit card debt over the 3 to 5 year plan, you will pay no interest during that time, preventing your debt from being the moving target.
The filing of the bankruptcy automatically stops all creditors in their tracks. This is because from the moment you file, the court extends its arms around you and protects you from all your creditors. This protection is called the ‘automatic stay.’ Creditors cannot legally garnish your wages or your bank account. They cannot repossess your car, house, or other property. They cannot cut off your utility service or welfare benefits.
If you car has been repossessed but has not yet been auctioned, the filing of a Chapter 13 will allow you to force the return of your vehicle.
Chapter 13 Bankruptcy can be used to buy necessary time. Perhaps you know you can’t catch up with your mortgage payments, but you need some time to sell your home. Chapter 13 can be a good way to buy the necessary time.
What are the disadvantages of Chapter 13 bankruptcy?
Chapter 13 requires a commitment for between three and five years. Each month you will have to make a payment to the Chapter 13 trustee. It’s a big commitment. It requires steady and stable income. If you are unemployed, chances are it will be difficult to fund a plan. The biggest reason plans fail is because debtors fail to make their Chapter 13 payments. When you have Ure Law Firm represent you, we make every effort to set up a plan payment is something you can afford. If a plan is not feasible, one of our Los Angeles bankruptcy lawyers will recommend another course of action prior to the filing.
What about my credit?
The Fair Credit Reporting Act does allow for the Chapter 13 bankruptcy to be reported for up to ten years, however, most credit bureaus have a policy of taking Chapter 13 bankruptcy off in seven years. Now, this does not mean you are in credit purgatory for seven to ten years. Far from it.
As soon as your plan has confirmed, you are going to start rebuilding your credit. It will be slow at first and the success of the reorganization plan should be a priority. When the plan has successfully completed and your case is discharged, that is when the credit rebuilding process truly begins. It will take about two years to get back on top of your credit score, but that is still a lot shorter than ten years.
Chapter 13 can be used to buy necessary time. Perhaps you know you can’t catch up your mortgage payments, but you need some time to sell your home. Chapter 13 can be a good way to buy the necessary time.
3-5 years sounds like a long time. Are there any quick fixes?
The lottery would be a quick fix, but we don’t see that as a realistic possibility. People who guarantee you an overnight solution or anything else are trying to take your money for their own benefit, not yours.
Reorganization takes time and it takes time for a reason. Our Los Angeles bankruptcy attorneys are experienced, so they understand that in order to ensure your success, you have to be given enough time to work your debts out without being hit too hard in the pocketbook. Once you consult with Ure Law Firm about your case, one of our bankruptcy lawyers will create a plan for you that are manageable and successful.
We know that three years does seem like a long time. But consider where you were three years ago and it probably seems like those three years flew by. The same will be true with the next three years.
Who can file for Chapter 13 bankruptcy?
Let’s change the question and ask – “Who can’t file for a Chapter 13 Bankruptcy?” Corporations cannot file for a Chapter 13 bankruptcy. If you own a business, you can file as an individual and include your business related debts. Everyone else can file for a Chapter 13 bankruptcy so long as your secured debts do not exceed $1,149,525.00 and your unsecured debts do not exceed $383,175.00
In order to file, you need to have a stable source of regular income. The money does not necessarily have to come from employment. It can be pension plan payments, social security, disability payments, unemployment benefits, child support or maintenance, royalties and rents, gifts of money from friends or family, and proceeds from selling property.
Once you have the money source, you have to have enough to fund the plan, this means you must have disposable income. It is your disposable income which will fund the plan.
You are probably a good candidate for a Chapter 13 if:
- You are behind on your mortgage payments or car loan and want to make up the missed payments over time
- You owe more to your 1st mortgage than your property is worth and you have a 2nd or 3rd mortgage
- You have taxes which are unpaid and are not dischargeable.
- You really want to pay off your debts, but simply cannot do it without the protection of the bankruptcy court