File Chapter 13 Bankruptcy

Chapter 13 (“Rehabilitation” or “Reorganization”) bankruptcy proceedings provide debtors with an alternative to surrendering (giving up) their assets in a Chapter 7 bankruptcy.  Regular and steady income is required to file a Chapter 13 bankruptcy.  Under a Chapter 13 bankruptcy, debtors use their future income to pay a portion of their unsecured debt (credit cards, personal loans, judgments, etc.), usually over a period of three to five years.  The payment is paid to a Trustee who distributes it to creditors according to the terms of a plan approved by the Federal Bankruptcy Judge.  Once the debtor has completed the terms of the Chapter 13 bankruptcy repayment plan, the debtor receives a discharge. 

 

Why Must I File Under Chapter 13 Instead of Chapter 7?

Even though Chapter 7 is a quicker and less expensive path to financial freedom, not everyone can qualify for a bankruptcy filing under Chapter 7. As discussed in the Chapter 7 section of our site, there are essentially two reasons a debtor in need of bankruptcy relief would be required to file bankruptcy under Chapter 13 rather than Chapter 7:

(1) having a household income above the state median and insufficient deductions to “pass” the Means Test, or

(2) owning assets that the debtor wishes to retain, for which Chapter 7’s exemptions would be inadequate.

 

If a debtor has a household income above the state median and cannot pass the “Means Test” required under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the debtor must file a Chapter 13 if the debtor wishes to file bankruptcy.  The Means Test will determine how much of the debtor's household income should be paid to the debtor's unsecured creditors through the Trustee over the term of the Bankruptcy repayment plan, which is usually three to five years.  Even if a debtor cannot file under Chapter 7 and has to repay a portion of their unsecured debt under Chapter 13, the debtor will often pay much, much less than the debtor would have had to pay without filing bankruptcy.

 

In some cases, a debtor has an income below the state median or otherwise passes the Means Test, but has assets that would not be completely exempt in a Chapter 7 Bankruptcy filing. If the debtor wishes to keep those assets but cannot immediately afford to pay the value of the assets to the Chapter 7 Trustee, filing bankruptcy under Chapter 13 is appropriate. This is often the case with debtors who have paid-off vehicles, expensive jewelry or vacant lots of land. To keep the assets with values exceeding the allowable Florida Bankruptcy exemptions, a Chapter 13 debtor would pay the non-exempt total value of the assets over the term of the Bankruptcy repayment plan.  Using Chapter 13 to "buy back" an asset prevents a debtor from losing assets that the debtor worked hard to obtain.

 

Why Should I File Under Chapter 13 Instead of Chapter 7?

Even if a debtor is otherwise eligible to file under a Bankruptcy under Chapter 7, Chapter 13 is a far more powerful weapon in your battle against debt. Chapter 7 is a quick and effective way for a debtor to deal with unsecured debt, but Chapter 13 enables a debtor to restructure secured debts as well.

 

Cure Mortgage Arrearages and Prevent Foreclosure

Arguably the biggest benefit to a Chapter 13 Bankruptcy is the ability to catch up on past-due mortgage payments and prevent foreclosure of your home. In a Chapter 13, the mortgage arrearages are divided by the length of your bankruptcy plan and included in the plan, allowing the mortgage holder to be paid monthly while you are in Bankruptcy.

 

Prevent Repossession of Your Vehicle

Similarly, a debtor can prevent repossession of their vehicle by paying the arrearages through their monthly Bankruptcy repayment plan.

 

Additional Benefits to Filing Under Chapter 13

Even if a debtor qualifies for Chapter 7 under both income and asset analyses, and even if the debtor is current on their mortgage and car payments, there are occasions when a Chapter 13 Bankruptcy filing makes more sense because of the debtor's unique financial situation. Though it may sound counter-intuitive, paying some portion of a debtor's unsecured debts for three to five years through a Chapter 13 may save the debtor thousands of dollars more than filing under a Chapter 7 would have.

 

Stripping Second Mortgages

A huge benefit available to a Chapter 13 debtor that is not available to a filer under Chapter 7 is the ability to "strip" liens or second mortages on a debtor's home. Although home values are on the rise, many homes on Florida's Treasure Coast are still "upside down," which means that the owner owes more on the home than it is worth. If a debtor has two mortgages on a property and owes more on the first mortgage than the house is worth, the second mortgage (including H.E.L.O.C. mortgages) is considered to be undersecured because the second mortage holder would not be paid in the event the first mortage holder foreclosed on the property. If a debtor in this situation files a Chapter 13 Bankruptcy and files a motion to strip, the entire amount of the second mortgage is converted to unsecured debt. The debtor pays the Trustee in the same manner as any other Chapter 13 case, and the second mortgage holder receives a portion of the amount paid to the Trustee just like every other unsecured creditor. If the debtor completes the Bankruptcy Repayment Plan successfully, the second mortgage debt is forever discharged and the lien against the property is removed, potentially saving the debtor thousands of dollars.

 

Cramming Loans on Vehicles

Another benefit only available to a debtor proceeding under Chapter 13 is the ability to "cram down" a car payment. New cars depreciate very rapidly, and some makes and models even more so. Many debtors find themselves three years into their car payments and owing thousands more on the vehicle than it is worth. If the vehicle was purchased more than 910 days prior, to the filing, a Motion to Value the vehicle can be filed soon after filing under Chapter 13. Once the motion is granted, the balance owed on the loan from the secured creditor will be valued at an amount equal to the value of the vehicle. The interest rate will often be lower than the original rate as well. 

 

Paying Non-Dischargeable Debts

Still another enormous benefit to a Chapter 13 Bankruptcy filer is the ability to pay debts that would otherwise not be dischargeable through a Chapter 7 Bankruptcy. Taxes, marital debts arising from marital settlement agreements and student loans are all examples of debts that can be paid during the course of the bankruptcy plan along with other unsecured creditors. 

 

Conclusion

Chapter 13 is an effective way to reorganize your finances, with many more benefits available to a debtor proceeding under this Chapter than under Chapter 7, but Chapter 13 is also far more complex than Chapter 7. If you are considering bankruptcy, you need to have a full array of options available to you. If it is appropriate for your financial situation, filing a Chapter 13 Bankruptcy could save you thousands of dollars. For this reason, it is imperative that you choose a firm with extensive experience filing Chapter 13 cases as well as Chapter 7 cases. You should also choose a firm that you feel comfortable working with for the next three to five years that you are paying your Bankruptcy plan. We offer an extremely personalized representation that those large bankruptcy mills just cannot match. With our firm, you are in the hands of our competent, compassionate attorneys during the entire time you are in Bankruptcy. Our attorneys remain involved in your case even after the initial consultation.  We promise not to pass you off to an associate you have never met, and you can get ahold of us by phone and email too!

 

The initial consultation is free. We offer evening and weekend appointments as well. Please call Bankruptcy Attorneys Christopher J. Jacobs and Tiffany A. Davis today for more information, or fill out the Online Contact Form.