Chapter 13 bankruptcy is normally used to catch up on past due mortgage payments, car payments, or taxes. Chapter 13 does everything a Chapter 7 does but has some additional benefits.

How Chapter 13 Works

Chapter 13 Bankruptcy is often referred to as a “wage earner plan” or a “debt repayment plan”.

In Chapter 13 Bankruptcy, the debtor files a “Chapter 13 Plan” with the bankruptcy court agreeing to make the best effort to pay off as much debt as possible over a three to five year period of time. The plan will classify debts in different categories such as secured and unsecured debts. Some debts, such as taxes and secured debts may be paid in full while others may only be paid a portion of the amount owed. In many cases, unsecured creditors do not receive any payment.

The debtor makes a monthly payment to a bankruptcy trustee determined by monthly take-home pay less monthly living expenses. (For example, the debtor’s after tax income is $2,200 per month, and the family’s living expenses are $1,900 per month [this amount does not include debts that will be paid through the plan such as car notes], the payment to the trustee will be $300 per month.) As mentioned above, the trustee will first pay priority debts (such as taxes & back due child support) together with the secured debts. From the funds left over after payment of secured and priority debts, the trustee will pay the unsecured creditors pro-rata. That means the unsecured creditors will get a portion of their debt repaid based on what they are owed. Most unsecured debts remaining at the end of the case are discharged. One exception is the remaining portion owed on governmentally insured student loans will not be discharged in most cases. In extreme cases, student loans can be discharged, but you must prove hardship, and the burden of proof is high.

Advantages of Chapter 13 Bankruptcy

Chapter 13 Bankruptcy, in some circumstances, can offer significant advantages over a Chapter 7 Bankruptcy. The main advantages are:

1. More debts are dischargeable in Chapter 13 Bankruptcy than in Chapter 7 Bankruptcy;
2. Non-dischargeable debts can be repaid through the Chapter 13 Plan (these include back taxes and child support). In many cases the monthly payment required will be substantially less than the creditor, such as the IRS, was requiring prior to the filing of the bankruptcy. Additionally, the priority debts can be paid without additional interest being added after the petition date.
3. In a Chapter 13 bankruptcy, a debtor can keep property which might be lost to the Trustee in a Chapter 7 bankruptcy.
4. In a Chapter 13, secured debts can be reduced to the value of the property involved. This is called cram-down or strip off. For example, if a debtor owes the bank or finance company $10,000.00 but the car which is the collateral for the loan is worth $7,000, the secured creditor will be paid the $7,000.00 plus interest through the plan. In the majority of cases, the interest rate paid through the plan is substantially lower than what you were paying before you filed bankruptcy. Below an illustration to explain how bankruptcy can lower a car payment:Assume that you own a vehicle which was purchased at least 910 days before bankruptcy was filed. You are upside down on the car and still owe $15,000 on a car worth only $10,000. In a Chapter 13 bankruptcy, however:
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5. A debtor can prevent auto repossessions and home foreclosures, and (in the case of a home foreclosure) repay the delinquency over a period of time.

Disadvantages of a Chapter 13 Bankruptcy

While Chapter 13 Personal Bankruptcy can offer some real advantages to a debtor, there are significant disadvantages as well:

1. Chapter 13 Personal Bankruptcy cases now come under greater scrutiny from the Court and from the Trustee. This is not a reason not to file a Chapter 13 Personal Bankruptcy though. The very foundation of the Bankruptcy Code is to provide relief for the honest debtor.
2. A debtor in a chapter 13 personal bankruptcy cannot sell any property without approval from the court.
3. A debtor in a chapter 13 personal bankruptcy cannot borrow any money without approval from the Chapter 13 Trustee.
4. A Chapter 13 Personal Bankruptcy case requires a debtor to be “in bankruptcy” for at least three years, whereas a Chapter 7 Personal Bankruptcy case is normally concluded in three to four months. As a result, the debtor cannot attempt to rebuild his or her credit until the case is closed out.
5. Lump-sum distributions such as personal injury and worker’s compensation settlements are considered future income and, if not exempted, may be considered as disposable income test and may have to be turned over to the Trustee. There may be exemptions available for a portion or all of a personal injury or workers compensation settlement depending on your particular facts.

Stop Home Foreclosure in Bankruptcy

Chapter 13 Personal Bankruptcy is especially helpful for catching up past due house payments. For example, if you are behind on your mortgage, you can pay back the past due payments over a three to five year period with no interest and no post-petition late fees. To illustrate, your house payment is $1,000 a month. You are five months behind. You would pay back through the Chapter 13 Plan at $83.33 per month if you had a 60 month (5 year plan). While the mortgage is being paid back, you must stay current on your regular monthly payment, but the mortgage company cannot foreclose because of the past due balance. If you fall behind in the Chapter 13 Plan, the mortgage company can file a Motion to Lift the Stay and foreclose. This means they can ask the Judge to do away with the protection of the bankruptcy and allow them to foreclose.

Another possibility of obtaining relief on a mortgage through bankruptcy (that we are seeing more frequently with declining home values) applies if you have a first and second mortgage. If the value of your home is worth less than the first mortgage, the second mortgage can be “stripped off” and treated as unsecured in a Chapter 13 Plan. What this means is that the second mortgage would receive the same amount as other unsecured creditors through the Chapter 13 Plan. Most Chapter 13 Plans pay a very small percentage or sometimes nothing at all to unsecured creditors. You would still have to make your first mortgage payment though.

Special rules apply where your home is a manufactured home and the home and land are financed separately. Or where you just financed the mobile home and own the land outright. In this situation, the mobile home can be “crammed down.” This means you can propose a Plan where on the mobile home you would only pay back the value, not the principle balance. This can be very helpful where you have owned the mobile home for several years, but you owe substantially more than it is worth. The same is true of the land in this situation where it is financed separately from the home, and you owe more than the land is worth.

Catch Up on Past Due Taxes in Bankruptcy

A Chapter 13 personal bankruptcy may be a good option for someone who owes taxes that are not dischargeable. Depending on when the tax was due; the type of tax; when the return was filed; and when the tax was assessed, your taxes may be treated as a priority debt. This means the tax debt will be paid before other unsecured debt. This is important because one main goal of filing bankruptcy is to have a clean slate, a fresh start when you receive your discharge. In some circumstances, taxes may be dischargeable. For more information on taxes, click here.

Going to Court in a Chapter 13 Bankruptcy

Every debtor must attend a “meeting of creditors“. The name implies that all the creditors will attend that meeting. However, only a few of the secured creditors normally attend. The meeting usually takes between five and fifteen minutes. We prepare you for and attend the hearing with you. At the hearing, the Trustee ( or his representative) asks the debtor some basic questions about information in the schedules (papers filed with the bankruptcy petition). In a Chapter 13 Personal Bankruptcy, you will be required to provide verification of specific items. We generally know what the Trustee requires for verification and will have already obtained that documentation from you. The only thing you will need to bring to the Meeting of Creditors is your government issued photo id and your social security card.

All Chapter 13 341 hearings for our clients our held in Tyler at the United States Bankruptcy Court for the Eastern District of Texas. The Tyler bankruptcy court is located at 110 North College Avenue in the Plaza Tower. The Chapter 13 Trustee’s offices are on the 12th floor.

Requirements for Completing a Chapter 13 Bankruptcy

The requirements for completing a Chapter 13 Personal Bankruptcy are generally:

1. all your income tax returns must be filed;
2. you must be current on any domestic support obligations;
3. you must have completed your personal financial management course; and
4. you must have made all your Chapter 13 payments.