Does a chapter 13 bankruptcy make sense for me?

When most people think of bankruptcy, they are thinking of a chapter 7 bankruptcy. This is where a person asks the court to discharge (wipe out) their general unsecured debts (credit cards, medical bills, collections, etc.) and get a Fresh Start.

Chapter 13 bankruptcy is a court-supervised payment plan. Understandably, most people would prefer to file chapter 7 and not make payments. In some cases, chapter 7 is not an option. If you have debts that cannot be discharged in chapter 7 (based on fraud, mortgage arrears, IRS, and family support arrears) a chapter 13 bankruptcy is a useful option to consider. Additionally, if someone makes more money than the court permits for a chapter 7 filing, a chapter 13 can still provide significant financial and emotional relief.

I want to file chapter 7 but my income is too high.

I have addressed this statement MANY TIMES during my career. It is one of the reasons I offer a no-cost consultation. Once I have explained the benefits of a chapter 13 bankruptcy plan to clients who earn more than is allowed in chapter 7, most see that it is still significantly better than their current situation.

A person is generally not required to pay 100% of their debts back in a chapter 13 bankruptcy. The amount that needs to be paid is based on the Means Test (how much money the household earns minus allowed expenses) and your current income minus your regular monthly expenses. They are similar, but not identical, tests that every person seeking to file bankruptcy must complete.

I was told that I have to pay back all of my debts in a chapter 13 – is that true?

No. The amount a person pays to creditors in chapter 13 can be very little – and sometimes even nothing. The amount will depend on your household income and the equity you have in your assets. During our initial consultation, I will likely be able to determine whether you will be required to pay all of your debts back or a much smaller amount.

What if the income test says that I have to pay off my debt in full?

In cases where a client’s income versus debt level is one that the Means Test requires a 100% plan (pay off all creditors in full) – chapter 13 will still result in a significantly reduced monthly payment to creditors. Why? Because you will not be paying the crazy interest rates charged by the credit card companies. To pay back all credit card debt outside of a bankruptcy, making just the monthly minimum payment will take, on average, 23 years. In chapter 13 bankruptcy, when you are not paying interest, and nearly all of the payment goes to principal, you can pay the debt a lot faster for less out of pocket each month. It is not uncommon for a client to have a chapter 13 payment be ½ of what they are currently paying on credit cards.

Protect your assets

Unlike a chapter 7 bankruptcy, where the goal of the trustee is to try to find assets that can be sold to benefit creditors, assets are protected in chapter 13 bankruptcies.

I have fallen behind on my mortgage payments, can chapter 13 help?

Yes! When you file a chapter 13 bankruptcy, several things happen:

All collection/foreclosure actions must stop – immediately;
No collections or further court/foreclosure actions can occur while the case is pending;
You will propose a plan that will outline how you will make the ongoing mortgage payment, plus enough to pay back the mortgage arrears, over the life of the plan (typically 3-5 years);
You will protect your home – and all other assets.

Benefits of chapter 13 vs chapter 7

1. Assets are protected.
2. Case can be dismissed if you want – you can get out of a chapter 13 but not a 7.
3. The automatic stay protects you for the duration of the chapter 13 (3-5 years) – no foreclosures, no repossessions, no collections.
4. Mortgage arrears can be paid back over a period of time of up to five years.
5. The interest rate on some car loans can be reduced.
6. Tax debt can be paid back over the duration of the plan.
7. IRS tax penalties can be discharged.
8. Older IRS tax debts can be discharged.
9. Debts to a former spouse – but for support – can be discharged.

Chapter 13 sounds like debt consolidation – why shouldn’t I just use one of the companies I see advertised on TV and the internet?

Unlike a debt consolidation – a chapter 13 payment plan is enforced by a federal judge. All of your creditors must do what the court says. A creditor cannot opt out of the chapter 13 plan and choose to not be involved. Negative reporting on a credit report cannot happen after a bankruptcy is filed.

Debt consolidation sounds great in the commercials – but in reality, they usually lead to more heartache and more financial harm. The costs charged by the companies to “help you” are significantly higher than you anticipate. Creditors are not bound by any agreement they make and can opt out at any time if they are not receiving the contractual monthly minimum payment. I have had many clients consult with me but then decided to try debt consolidation because it “sounded so much better” or “my mother said it would be better for me and my credit”. Those clients are usually back consulting with me a year or two – and many thousands of dollars later – desperately needing to file a chapter 13 bankruptcy. At this point, the client checks their credit and sees that their creditors have been reporting “late payment” and “missed payment” every month even though they have made the payment to the debt consolidation company.

Contact my office and schedule a no-charge telephone consultation. My assistant will let you know what information I would like you to have in front of you during the call. If, at the end of our conversation, you decide you do not wish to proceed with a bankruptcy, there is no cost to you.