Chapter 13
Chapter 13 bankruptcy allows a person to consolidate their debt while making monthly payments to a trustee. A payment plan is proposed which repays the debt over a three to five year period. The amount of the monthly payment and the length of the repayment plan is based upon the following factors:
- Your monthly income
- Your monthly expenses
- Amount and nature of the debt
Secured debts are paid 100% on the dollar, while unsecured debts may be paid as little as 0% on the dollar. A person receives a discharge under Chapter 13 once the payment plan is completed.
The Chapter 13 Process
In Chapter 13, you must submit a plan in which you set out a budget detailing your take-home pay and monthly living expenses. Any excess income is paid to the bankruptcy trustee who distributes the money to creditors. The plan usually lasts for 3 to 5 years, but it may be shorter if your debts can be fully repaid in less time. At the end of the Chapter 13 plan, a petition is filed asking for a discharge and any of the unsecured debts that are not paid off are eliminated.
The most common uses of Chapter 13 involve:
- Stopping home foreclosures
- Restructuring auto loans to save a vehicle
Typically government debts such as taxes are not dischargeable, however there are great benefits to putting tax debt into a Chapter 13 plan. Chapter 13 may freeze interest and penalties on some taxes. This gives you a chance to budget out a repayment plan in real dollars, and the payments you make go directly to reduce the principle. Most people trying to repay back taxes are fighting an uphill battle with interest and penalties working against them, but in Chapter 13, you may get a break from these fees and pay what you owe on the day you filed the case.
You may want to consider Chapter 13 if:
- You are behind on your mortgage but could make your monthly mortgage payment if your mortgage company would accept it.
- You have regular income and can pay your living expenses, but you can’t keep up the scheduled payments on your debts.
Advantages of Chapter 13:
- You can keep most of your property while spreading out time to pay past due accounts
- You’ll have 3-5 years to catch up delinquent accounts—according to a schedule that you and the bankruptcy trustee have agreed is workable for you and that your creditors must abide by.
- You’ll make one monthly payment to the bankruptcy trustee for distribution to your creditors—you’ll have no direct contact with creditors during the protection period of 3-5 years.
Disadvantages of Chapter 13:
- This is not a get out of jail free card, this is still bankruptcy, and you must make your monthly payment to the trustee.
- This can hurt your credit in the short term, but over the long term your credit should improve.
- You will be marketed to by every slimeball and slug on the planet trying to sell you expensive credit and lousy products, but my office will be glad to guide you how to rebuild your financial life.
