Chapter 13 bankruptcy is slightly more complex than Chapter 7 bankruptcy and is sometimes referred to as “reorganization bankruptcy”. If you do not qualify for Chapter 7, you are required to file under Chapter 13. Additionally, Chapter 13 provides certain protections and benefits that Chapter 7 does not provide. Depending on your individual situation, Chapter 13 may be the best option for you.
The Process Of Chapter 13 Begins The Same Way As Chapter 7
You will meet with your attorney and compile a complete list of your property and a complete list of your debts. In Chapter 13, in addition to filing the bankruptcy petition, you will also file a proposed Chapter 13 plan. This plan is your proposal to the court as to how much you intend to pay to the trustee each month and what debts will be paid during the life of your Chapter 13 case. A Chapter 13 case must run at least 36 months but no longer than 60 months. The trustee and the court will ultimately review the proposed plan, and if it meets all the legal requirements, then the court will approve your plan. You will keep making a single payment to the trustee each month while you are in bankruptcy, and the trustee will then pay the money to the specific creditors that were in your approved plan. At the completion of your plan, any debt you owed at the time of filing that is not paid in full is wiped out and you no longer owe that debt.
While There Are Many Reasons Why Chapter 13 Might Be Your Best Option, The Most Common Reasons Are Listed Below:
- You have too many assets or make too much money to file Chapter 7 bankruptcy
- You want to stop a home foreclosure
- You wish to strip an unsecured second mortgage from your home
- You want to stop repossession of your car
- You owe tax debts and want to pay it back over time
- You have already filed Chapter 7 bankruptcy within the past eight years
Under Chapter 13 bankruptcy, you receive the same protections from creditors as you would under Chapter 7. Creditors cannot harass you, you cannot be sued, your car cannot be repossessed, and wages cannot be garnished.
You Can Keep All Of Your Property In Chapter 13:
One of the benefits that you receive under Chapter 13 is that you can keep all of your property, even if it is worth more than the exemption limit. In Chapter 13, unsecured creditors (credit cards, medical bills, payday loans, etc.) must receive at least as much as they would have received if you had filed a Chapter 7 case. If all of your property would have been protected under Chapter 7, then creditors would have received nothing. You may be able to propose a Chapter 13 plan in which unsecured creditors receive nothing. However, if you have property that you would have lost in Chapter 7, you can keep the property in Chapter 13. You just have to pay the difference over the life of your Chapter 13 plan so that the unsecured creditors receive at least that much.
Here is a simple example:
The current exemption limit in Missouri, if you are required to claim Missouri exemptions, is $3,000 of equity in a motor vehicle. If you owned a car that was worth $9,000, but you owed $4,000 on the loan, you would have $5,000 of equity. This would mean that if you filed Chapter 7, the trustee could take your car, sell it, and then use the $2,000 of non-exempt equity to pay unsecured creditors. Under this scenario, you could lose your car if you filed Chapter 7 bankruptcy.
However, under Chapter 13, you would be able to keep your vehicle. The way it works is that over the life of your plan, you would have to pay $2,000 that would go to unsecured creditors. This necessary amount to keep the vehicle would be calculated as part of your monthly payment so you would only be paying a little bit of it each month. In this example, if a person wanted to keep their vehicle, Chapter 13 would be the best option for them.
Stopping Home Foreclosure:
Another main reason that a person may want to file a Chapter 13 case instead of a Chapter 7 is if you are behind on your mortgage payments and facing foreclosure. Chapter 13 allows you to keep your home and get caught up on payments through your plan. If a person is behind on their mortgage by a few months and the bank is either threatening or has already started foreclosure proceedings, then by filing a Chapter 13 case, the foreclosure would be automatically stopped. The proposed plan would require that the homeowner pay their current monthly mortgage payment to the trustee, as well as a little extra each month to make up the past due amount. Each month, the trustee would disburse the current monthly mortgage payment to the lender, as well as a portion of the past due amount. Once the plan is completed, the homeowner would then be current on their mortgage, and the bank could not foreclose on the property. Chapter 13 is absolutely necessary if a homeowner is facing foreclosure and wants to save their home.
Vehicle Loans In Chapter 13:
Depending on your individual case, there are potentially two huge benefits with Chapter 13 when it comes to vehicle loans. The first is what is called “cram down”.
Under bankruptcy law, if you own a vehicle for personal use, and you took out the loan on the vehicle more than 910 days prior to filing bankruptcy, then you are allowed to “cram down” the balance of the loan to the value of the vehicle. For example, if a person filed bankruptcy and had purchased a car three years prior to filing, the vehicle might be worth $7,000. However, if the person did not get a good deal on the vehicle, they might still owe $11,000 on the loan. Under this scenario, a debtor’s Chapter 13 plan would have to pay either the value of the vehicle or the loan balance, whichever is less. So with this example, the debtor would only have to pay $7,000 on the vehicle, and the remaining $4,000 would be treated like credit card debt. Upon successful completion of the Chapter 13 plan, the debtor would then own the vehicle outright, and the lender would not be able to pursue them for the remaining $4,000.
Another benefit of Chapter 13 when it comes to vehicle loans, or secured debt in general, is that a debtor repays the debt through the plan at the current Chapter 13 interest rate. The rate varies depending on whether the case is filed in Missouri or Kansas but is often much lower than the interest rate the debtor was paying prior to filing their case. Sometimes, if a person did not have good credit when they purchased a vehicle they might be paying over 20% interest under their original contract. Once they file bankruptcy, they would repay the loan at the Chapter 13 rate, which may be closer to 5% to 7%. Even if a person has owned their vehicle for less than 910 days and is not eligible to “cram down” the value, they are still entitled to the lower interest rate when repaying their vehicle loan through a Chapter 13 plan.
Clearing Unpaid Taxes In Chapter 13:
Nobody likes dealing with the IRS. If you owe back taxes to the IRS, they have the power to garnish your wages, place a lien on your property, and generally make your life miserable until they get paid. However, you can stop these problems through a Chapter 13 case. One of the requirements of any Chapter 13 plan is that it must repay any priority debts in full over the life of the plan. The most common types of priority debts are tax debts and past-due child support or alimony. If a person owed the IRS $10,000 in back taxes, they would propose a plan that pays the IRS back over the life of their plan. As long as the person remains in Chapter 13 and complies with their plan, the IRS cannot take any collection activities to collect the past due taxes because they will be paid in full through the court-approved Chapter 13 plan.
Even if a person is eligible to file a Chapter 7 case, it may not be in their best interest. If a person is behind on their mortgage, in a bad car loan, or owes the IRS back taxes, a Chapter 7 filing will temporarily stop those problems for the 90–120 days that the case is pending. However, as soon as the person receives their Chapter 7 discharge, the foreclosure can resume, a repossession can resume if the person is behind on payments, and the IRS can resume collection activities. If a foreclosure or unpaid taxes are issues causing financial problems, a Chapter 7 case is merely a short-term band-aid. It will not fix the underlying problem. With a Chapter 13 case, you can reorganize your debts and repay the people who need to be repaid so that you can keep your house, keep your vehicle, clear up any tax issues, and save property that you might lose if you filed a Chapter 7 case.
When deciding whether Chapter 7 or Chapter 13 bankruptcy is right for you, it is important that you consult with a knowledgeable bankruptcy attorney to analyze your entire situation. Sometimes, you have no choice and you have to file Chapter 13 because you don’t qualify for Chapter 7. In other situations, you might qualify to file a Chapter 7, but there are strategic advantages to filing under Chapter 13 instead. A qualified bankruptcy attorney can discuss the pros and cons of each type of bankruptcy with you.