Chapter 13 bankruptcy is a popular form of bankruptcy proceeding, designed to create a repayment plan to repay both unsecured debts and secured debts. However, Chapter 13 bankruptcy is different from Chapter 7 bankruptcy. In this article, we will explore the bankruptcy basics involved in a Chapter 13 case and what it can and can't do for you.
Our goal here at Oklahoma Bankruptcy Law is to help you make an informed decision before you decide to file for bankruptcy. If you have any questions about filing a Chapter 13 case or questions about Chapter 7 bankruptcy, Oklahoma Bankruptcy Law by the Law Offices of B. David Sisson provides free consultations for both Chapter 13 and Chapter 7 bankruptcy as well as potential alternatives to bankruptcy.
Goals of Chapter 13
There are several goals of a Chapter 13 case. First, though, let's briefly talk about the overall goal of this type of bankruptcy proceeding, which is to preserve your assets. To qualify to file for a Chapter 13 bankruptcy, you must first meet a few basic qualifications:
- You must have a steady income. This can include self-employment. The requirement is that you have a regular income that allows you to make the required monthly payment for the Chapter 13 plan.
- You must be up-to-date with your tax filings.
- You must be current on car payments or house payments if you want to keep these assets.
- Your unsecured debts must be less than $394,725 and your secured debts must be less than $1,184,200 according to US Courts Bankruptcy Basics.
- You must be an individual or a sole proprietor (not a corporation, corporations may file a different form of bankruptcy to take advantage of a repayment plan).
What Can Chapter 13 Bankruptcy Do?
What Chapter 13 bankruptcy can do is substantially different from what Chapter 7 can do. Chapter 7 is often referred to as the "no-asset" bankruptcy because the only assets that you get to keep are those that are exempt under federal or state statute or those that have no equity due to properly perfected liens. If there are any assets outside of those, the trustee may liquidate them and take the funds received to pay unsecured creditors according to how they are categorized:
- priority creditors
- unsecured creditors.
However, most individuals that file Chapter 7 bankruptcy are considered "no-asset," which means that they only have the number of assets they are allowed to keep according to bankruptcy law. Once they complete their credit counseling, attend their 341 meeting, and complete the other requirements, they receive their discharge. They have no payment plan. Chapter 7 is not designed for anyone who wants to keep their non-exempt assets or those with excess disposable income or anyone who needs to keep a car or home they are behind on.
So, what can a Chapter 13 case do for you?
Save Your Home
If you are behind on payments or if your home is in foreclosure and you file for bankruptcy, a Chapter 13 plan can help you save your home. Your monthly payment for your home can be included both in your budget to keep your home caught up in the future as well as help you get caught up on payments you missed. Your missed payments can be paid back over a period of three to five years.
However, to ensure that you do save your home from foreclosure, you must make each monthly payment on time for your home. The missed payments are included in your Chapter 13 debt repayment plan.
Can Stop the Eviction Process
If you are a renter and you've received an eviction notice, a Chapter 13 case can stop the eviction process. Filing a Chapter 13 bankruptcy causes an automatic stay to be issued. This stops your landlord from starting or continuing the eviction process because it is a collection action. The landlord also may not continue to bill you for past due rent while you are actively in bankruptcy status. Past-due rent can be placed in the repayment plan and paid off over a period of three to five years. You can continue to make your future rent payments on time to avoid future eviction while paying off what you owe.
Reduce high interest rates on secured debts
If poor credit scores have left you vulnerable to predatory high interest vehicle loans or furniture/appliance loans, Chapter 13 bankruptcy can allow you to negotiate to “cram down” these high interest rates to a more fair interest rate sometimes saving you thousands of dollars on the total cost of the loan.
Reduce or stop future interest and penalties on Tax Debt
If you owe large amounts in tax debt, you may find it impossible to make headway trying to pay it down due to the continuous accumulation of interest and penalties. Chapter 13 allows you to pay back priority tax debt over the length of the plan with no new penalties and lower or no new interest accruing, thereby allowing you to finally gain some ground on paying it back and allowing it to be paid faster and for much less money than entering into a payment plan directly with the IRS or state tax authority outside of Chapter 13 bankruptcy.
Lower or Remove Unsecured Debt Payments
Unsecured debts are one of the main reasons that cause people to file for bankruptcy. As you learned about Chapter 13 bankruptcy, this form of bankruptcy allows you to keep your non-exempt assets, unlike Chapter 7. There are also other benefits. Although it does require you to follow a repayment plan and use your disposable income for three to five years to pay toward your debts, you may be able to lower or remove unsecured debt, all without calling each creditor and negotiating.
Credit Card Debt
Credit card debt is most often treated as unsecured debt on Chapter 13 repayment plans. Generally, while they get something out of the repayment plan, they don't get as much as debts that are classified as secured or priority. However, if a credit card company believes that their credit line was used to defraud them, they can bring that to the attention of the bankruptcy court.
Medical bills are one of the main reasons why people end up filing for bankruptcy. COVID-19 certainly hasn't helped this. Unexpected medical bills, and even expected medical needs, seem to be more expensive or even come at the worst time. Under Chapter 13 bankruptcy, medical bills are treated as unsecured debt. You may end up paying less than you owe or nothing on some or all of your medical bills.
Most personal loans are also considered unsecured debts unless they are backed by collateral. Personal loans that are not backed with collateral would be considered unsecured debt. They may also end up being paid at less than what is owed or not at all.
May Protect Co-signers
Filing a Chapter 13 case may, in some instances, help protect co-signers if you have debt that could potentially affect them. Chapter 13 bankruptcy offers a co-debtor stay. When you file for bankruptcy, you are referred to as the debtor.
If there is someone who co-signed for you on a loan of some kind, they are referred to under bankruptcy law as a co-debtor. When your automatic stay begins, your co-signer is also protected from the debt collectors as well as other collection actions until the bankruptcy case is over or until the court lifts the automatic stay.
Make One Payment
Having a Chapter 13 repayment plan simplifies paying your debts. You make one monthly payment that is determined by your monthly income and your monthly required spending and the amount necessary to pay back any priority debts or secured debts for collateral you need to keep. Your one monthly payment for your secured debts and unsecured debts is made directly to the bankruptcy trustee that is appointed to oversee your Chapter 13 case. The bankruptcy trustee then distributes the funds to the creditors.
What Can't Chapter 13 Bankruptcy Do?
Now that you understand the benefits of Chapter 13 bankruptcy, let's discuss a few of the things Chapter 13 cannot do.
Can't Get Rid of Student Loan Debt
Chapter 13 does not cause your student loan debt to be discharged at the end of your repayment plan. While student loans may be treated as nonpriority unsecured debts during the time you are making your monthly payments, you are required to keep paying them after your Chapter 13 bankruptcy is completed and you receive your discharge. Even though it does not discharge your student loans, you may find that a Chapter 13 case helps you manage the rest of your debt enough to be able to afford to pay off your student loans in the future.
Can't Remove Recent Tax Obligations
When you file a Chapter 13 case, new or recent tax debts generally are not discharged, although some older ones may be. Recent tax debts may be treated as priority debts. They will be paid in full. However, a Chapter 13 bankruptcy could help you get a more favorable monthly payment compared to working directly with a tax authority.
Can't Get Rid of Alimony or Child Support
Filing for Chapter 13 bankruptcy also does not provide you with a discharge from support alimony or child support. Domestic obligations are treated as priority debts. They will be paid in full, including any payments that are behind. If you still owe alimony or child support after completing your payment plan, you must continue to make your payments on time.
Can't Get Rid of Debt from DUI or Other Malicious Actions
If you are fined or ordered to pay restitution because of a DUI or other criminal case (which may also be referred to as a malicious action), filing Chapter 13 will not allow you to obtain a discharge for any of the unpaid part of the debt. You are required to repay all of what you are fined or ordered to pay because of the criminal or malicious act.
Can't Remove Debt You Don't Report During Filing Period
It is very important when you first begin the process of filing for Chapter 13 that you make sure that you report all of the debt that you want to include in your repayment plan. The debt that you do not report when you file your petition and schedules, you will not be able to remove.
Is Chapter 13 Right for You?
If you're considering Chapter 13 bankruptcy, it is important to determine if it is right for you and your circumstances. To learn more about Chapter 13 and how it would affect your life, schedule your free consultation with the team at Oklahoma Bankruptcy Law now!