An Overview of Chapter 13 Bankruptcy
The basic steps involved in a typical Chapter 13 bankruptcy case
Chapter 13 bankruptcy, usually referred to as reorganization bankruptcy is drastically different from Chapter 7 bankruptcy. In a Chapter 13, there is a repayment plan and another hearing on top of the 341(a) creditor hearing meeting. Furthermore, Chapter 13s are typically known for their ability to stave off secured arrears thus enabling someone to save their home (if they qualify) and stripping junior mortgages off homes (only where the first mortgage is greater than the present value of their home).
Chapter 13 Eligibility
To be eligible for a Chapter 13 bankruptcy, the filer must prove to the court that one is able to afford a monthly plan. If one's income is too irregular or small, the court might disallow the filer from embarking on the Chapter 13. For this reason, it is prudent to talk to a knowledgeable attorney as Chapter 13s are a different creature from Chapter 7s.
Unlike Chapter 7, Chapter 13 also has debt limits for filers. As of April 1, 2010, if your secured debt limit is above $1,081,400 or your unsecured debt is above 360,475, then you do not qualify for a Chapter 13.
The Chapter 13 Process
Similar to Chapter 7 bankruptcy, one must complete a credit counseling class. As with Chapter 7 bankruptcy filers, any and all clients with Esquire Law Center would complete their credit counseling class online. Not only is this more convenient for every filer, it is also more expedient and efficient.
Once the case is filed and confirmed, the debtor will begin making the Chapter 13 plan payment every month to the trustee. The filer will make this payment every month for the next 3 – 5 years. Making the payment is crucial as a disruption of the plan could lead to the whole case unraveling. There are instances where the trustee will allow a modification of the payment plan where the debtor's income falls below what was originally proposed. However, if it falls too much, the case could get dismissed and/or converted to a Chapter 7.
The Chapter 13 Repayment Plan
This plan is the monthly payment the filer pays each month to the trustee for the duration of the plan. The plan must pay the full amount of the secured arrears during the life of the plan. The unsecured creditors will usually receive what is left over and is many times only a small percentage of what they are owed. However, if the life of plan cannot fund the total amount of the secured arrears, this could be cause for a dismissal of one's case. To avoid this, it is best to plan the Chapter 13 beforehand as to not the filer's time and money.
Length of Chapter 13 Plan
The length of your Chapter 13 payment plan typically depends on whether the filer is above or below the state median income. If you are below the state median income, the plan will usually last for 3 years. The filer may want to do a 5 year plan if they cannot propose a 3 year plan that could pay off their secured arrears. If the filer's income is above the state median income, the plan will typically be a 5 year plan. In the case of 100% plans, the plan will cease once all creditors are paid in full.
Stripping 2nd Mortgages in a Chapter 13
One aspect of a Chapter 13 that is vastly different from a Chapter 7 is the possibility of stripping a junior mortgage. Within a Chapter 13, an attorney may file a motion or adversary proceeding to completely eradicate the junior mortgage. The caveat is that the first mortgage must be greater than the present value of the home to show that the junior mortgage is completely unsecured. Furthermore, the Chapter 13 must be completed in order for the junior mortgage stay eradicated. If the Chapter 13 plan is not completed, the junior mortgage can come back. Therefore, it is imperative that the Chapter 13 plan be completed as scheduled.
The Chapter 13 discharge
Once the time for the payment plan is completed, the rest of your debt will be discharged. Every filer must remember to complete their post–credit counseling class. After this, the filer will receive their discharge papers and their "fresh start" may begin.