Chapter 13 Bankruptcy
Chapter 13 bankruptcy allows an individual to consolidate his or her debt. Depending upon the circumstances, the debtor may pay none of their unsecured debt, they may pay all of such debt, or somewhere in between. Reasons to file a Chapter 13 include:
- Saving a home from foreclosure by paying back missed mortgage payments over the life of the plan;
- Paying the actual value of a vehicle at a lower interest rate if the vehicle was purchased at least 2 1/2 years ago (known as a "cramdown");
- Using the chapter 13 to reinstate a driver's license suspended due to unpaid tickets holding a license;
- Avoiding the loss of assets that would be sold in a Chapter 7 case by paying the same value over the life of the plan;
- Protecting co-signors of a loan so that the creditor will not pursue the co-signor;
- Paying taxes that are not dischargeable over the life of the plan (known as "priority taxes");
- "Stripping" (removing) a 2nd mortgage that is secured against the home depending upon the circumstances; and
- Discharging debt that cannot be discharged in a Chapter 7 case.
A debtor files a Chapter 13 plan, along with other required documents, seeking an order approving a payment plan for three to five years. Upon the case filing, an automatic stay is triggered which requires the creditors to stop any further collection activity (including stopping foreclosure proceedings, wage garnishments or other actions). The goal is to have the plan approved by the judge, thereby forcing the creditors to abide by the order. The debtor makes the payments and at the end of the case the debtor receives the Order of Discharge. The discharge wipes out the debts that are dischargeable such as credit card debt, medical bills, personal loans even if they have not been paid in full.The process may best be described by an example. An individual owns a house and has fallen behind on the mortgage a few months ago and also has significant credit card debt and medical bills. Through a Chapter 13 reorganization, the individual pays the mortgage and missed mortgage payments with the objective of being caught up with all mortgage payments by the end of the plan, thereby saving the home. The credit card debts, medical bills and other debts are also part of the Chapter 13, and if for instance the debtor is required to pay only a small percentage of such debt, at the end of the case the remaining debts would be discharged. When the case is finished, the debtor is current with the mortgage and has no other debt, which obviously would be a positive result.
Proof of income for the past seven months, including pay statements, and any other income such as unemployment compensation, bonuses, retirement income and other sources.
- Collection letters, bills, notices, court papers.
- last 60 days' of bank statements of all bank accounts.
- All agreements for purchases or leases of vehicles, motorcycles, RV's, boats, etc.
- If owing tax debt, all tax notices including obtaining a copy of the "Account Transcript" from the IRS for any years that debt may be owed.
- Federal income taxes for the past two years and verification that all returns have been filed for the past four years.
- Court documents of any lawsuits and/or judgments.
- All foreclosure documents (if owning real property).
- Copies of all credit reports (credit reports from all three of the credit bureaus - Experian, Equifax and Transunion - can be obtained for free at AnnualCreditReport.com).
A debtor is required to appear at a Section 341 Meeting of Creditors approximately 30-40 days after the case filing. An attorney for the Chapter Trustee's office will be present to ask questions. In particular, you will be required to testify under oath that you have read and signed the documents, that you have listed all of your assets and debts, any transfers of assets in the past two years, any payments to friends or family members within the past year, whether you the value of assets such as a home or other property, whether you own a business, and potentially other questions relevant to your case. Usually the meeting only takes a few minutes (but the meeting is important because the testimony is under oath and subject to the penalty of perjury. After the meeting of creditors, a confirmation hearing (hearing to approve the Chapter 13 Plan occurs, though usually the debtor is not required to attend the confirmation hearing unless specifically required, such as for an objection to confirmation by the Chapter 13 Trustee. The goal of chapter 13 case is to obtain confirmation of the Chapter 13 Plan, which is a court order detailing the terms of the plan such as the payment amount, payments and interest rates to secured creditors such as a mortgage or car loan, and other payments. The plan is binding on the debtor as well as the creditors. The plan may be modified by the debtor or trustee based upon a substantial change of circumstances (such as an income increase or decrease).
The means test is a set of calculations that starts with the gross income of the debtor(s) for the six months prior to filing. Income includes all sources, including jobs, self-employment, unemployment compensation, VA benefits, retirement income, and any other incoming funds with the exception of social security payments. The household size must be determined. Certain expenses may also be relevant to the means test, such as payments toward a mortgage or vehicle, or certain other expenses such as daycare, high medical bills, taxes and other items.If the debtor is above the median income, in a Chapter 13 case they are subject to a mandatory five year plan (unless all allowed claims are paid in full prior to five years). If the debtor is below income, the plan length will be somewhere between three to five years. The means test calculation is important in determining the length of the plan (three or five years). The means test calculation also dictates the amount, if any, of unsecured debt that the debtor is required to pay an amount to unsecured creditors. If financial circumstances have changed in the past six months or after filing, the calculation may not be relevant to determining the pan payment (but this is the exception). The means test calculation can be complicated and an analysis by an experienced bankruptcy attorney is highly recommended.
Note: The above-discussion is only a brief statement regarding the laws of a chapter 13 bankruptcy. If you are considering filing for bankruptcy, it is highly recommended that you consult an attorney regarding your specific situation to determine whether bankruptcy is appropriate, and if so, whether a chapter 7 or chapter 13 bankruptcy is your best option.