Chapter 13 Bankruptcy Explained
Chapter 13 was once called the “wage earner plan.” The debtor proposes a plan which pays what is required to the Chapter 13 Trustee. When that plan is confirmed, the Trustee then distributes the funds to creditors who file proper claims under the Bankruptcy Code. The commitment period required is between three and five years. Upon successful completion, unpaid debt is discharged, and the debtor has finally earned a fresh start.
There are three things that will determine how much a given debtor must pay into a Chapter 13 plan:
- Certain claims which have a priority must be paid in full. Among these are certain taxes and all domestic support obligations. Creditors with claims secured by a home mortgage or secured by a recently purchased vehicle must generally be paid in full, whether through the Trustee or by direct payments from the debtor during the case.
- If the debtor has non-exempt property which they desire to keep, then there must be enough money paid into the plan to pay out to those creditors as much as they would have received if the debtor had filed a Chapter 7 case. This is the “liquidation test” that the debtor’s plan must satisfy.
- Some debtors have a household income that is above the median for a household of their size and location. Such debtors may still obtain Chapter 7 relief if their “disposable income,” as determined under a statutory formula, is insufficient to pay a significant dividend to their unsecured creditors. Debtors whose income is too high under the Chapter 7 “means test” are still eligible for Chapter 13 relief, but they must pay into their plans enough for their unsecured creditors to receive that “disposable income” in the Trustee distributions under their confirmed plan. The statutory formulas control, but sometimes the debtors have enough actual income, after paying necessary household expenses, to fund a Chapter 13 plan that pays only part of the unsecured claims and gives the debtors the benefit of significant discharged debt at the end of the case.
Is Chapter 13 Or Chapter 7 Right For You?
There are four situations in which Chapter 13 may be a better alternative to a Chapter 7 bankruptcy case.
- Chapter 13 bankruptcy is most useful to those whose problem debts include being behind in payments on a home mortgage or car loans. Filing the case stops creditor foreclosure or repossession action and gives the debtor the opportunity to cure the arrearage over a period of from three to five years. Under the practice in the Eastern North Carolina Bankruptcy Court, such debtors must pay into their plan the amount of the regular contractual monthly home mortgage payment plus an amount necessary to cure the arrearage. All of this is subject to the Trustee administrative charge for the work of administering and distributing the funds to creditors who file proper claims. If there are no “liquidation test” or “disposable income” issues, (as explained below) then the amount needed to fund a successful plan in such a case must only add the base attorney fee (which is set by the court) to the regular payments and the total arrears.
- A similar approach can be taken if the problem debts include a vehicle loan whose payments are behind. If that vehicle was purchased within 2 1/2 years of the case filing, then the contractual payments must generally be made going forward as well as an amount necessary to cure the arrearage. This is similar to the home mortgage situation described above. If the vehicle was purchased more than 2 1/2 years before the Chapter 13 case is filed and its resale value is significantly less than the amount owed, the debt total can be reworked to the debtor’s advantage by being paid through a Chapter 13 plan. If you are behind on home mortgage payments and/or car payments, you should consult an experienced bankruptcy attorney to help you evaluate your situation and recommend the best course of action.
- If you should happen to own non-exempt property (lots of equity in a home or a relatively new, paid-for vehicle) that you wish to keep, but still have too much debt, you may be able to keep the property by funding a Chapter 13 plan which pays the necessary dividend to your creditors under the “liquidation test” but still discharges significant unpaid debt upon completion of the plan. You will have “bought back” that non-exempt equity by successfully completing your Chapter 13 plan.
- For those with relatively high earnings but even more accumulated debt, being ineligible for Chapter 7 relief under the “means test” does not prevent you from filing Chapter 13. If you can fund the plan out of your real disposable income, your creditors must stay on the sideline and take what the Trustee distributes to them. At the end of the case, the remaining unpaid unsecured debt is discharged just as it would be under Chapter 7.
Consult An Experienced Bankruptcy Attorney Before Making A Choice
Finally, there is the “no money down” bankruptcy advertised by a number of other attorneys. Like most “low payment” advertising, it may not tell you that the total cost of obtaining this discharge in bankruptcy is, on average, about three times or more than the cost of a Chapter 7 case. It glosses over the fact that you must successfully make the required Trustee payment for at least 36 consecutive months in order to obtain your discharge of debt. Unless you are in one of the four situations described above, Chapter 13 may not be the better choice for obtaining bankruptcy relief. If you simply cannot raise the money to file a straight Chapter 7 case, then Chapter 13 offers this alternative.
Attorney Douglas Wickham at Wickham Law, will give you honest advice about your situation and about what may be the better way for you to obtain bankruptcy relief. Contact him at 919-944-4913 or get in touch with this email form.
Wickham Law is a debt relief agency. The firm helps people file for bankruptcy relief under the Bankruptcy Code.