Chapter 13

Chapter 13 has powerful tools to reorganize and deal with debts to help you build your fresh start.








A common misconception is that Chapter 13 means you are repaying all your creditors.  Not true.






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A Chapter 13 normally ends with a discharge, permanently making debts uncollectable.

The Bankruptcy Code (11 U.S.C.) is divided into Chapters, which lead to different types of bankruptcies.  Chapter 13 is also known as a "simple reorganization," and subject to certain limitations.  First, only people can file for chapter 13; not businesses.  Second, your debt's cannot exceed a statutory limits (11 U.S.C. section 109(e)),  of approximately $385,000 in unsecured and $1,080,000 in secured debt.

The Chapter 13 Plan

The heart of a Chapter 13 is the plan.  The starts with a monthly payment to the Chapter 13 Trustee, and instructs the trustee where to send that money.

After a plan is proposed, it must be confirmed.  Unlike Chapter 11, your creditors don't get to vote in a Chapter 13, but must be treated correctly under the law.  Once the plan meets the requirements, the Court will confirm the plan, and it will become the order of the Court for the rest of your case.

Pay off a vehicle

​Another powerful tool is used to pay off secured property, most often vehicles.  By paying the vehicle through the plan, you are often able to reduce the interest rate to a statutory amount (often 4-5%), based on the Case In re Till.  Additionally, many secured debts can be paid off for what the property is worth, not what the loan amount is.​  This is a great tool for salvaging depreciating assets (like cars) that are underwater.

Taxes

Your chapter 13 plan can be used to repay back taxes.  Often, not the entire tax bill is entitled to priority, so only a portion must be repaid - the balance can then be dicharged

Chapter 13 is open to higher income earners than Chapter 7

If your income is too high to permit a Chapter 7 filing, a Chapter 13 might still be an option.  In a Chapter 13, the excess income (calculated by looking at your income and subtracting allowed expenses) doesn't keep you out - it just means your creditors might get a dividend.  That dividend might be 2%, it might be 80% - each case is different.

Additionally, the discharge normally will affect any creditor who had notice of your case - whether they applied for money or not, whether they were paid money or not.

Get Caught Up

Your chapter 13 plan can be used to get caught up on a mortgage or auto loan.  

The arrears (back payments) owed on the house or car would be paid back over the life of your Chapter 13.  Your responsibility is to send in the monthly trustee payment, then the trustee cuts it up and distributes it according to the plan.

Strip a Second  Mortgage

One of the most powerful tools is the ability to remove liens against your property.  

For example, say Fred owns a house worth $450,000.  Fred owes $500,000 on his mortgage, and $150,000 on his home equity line. Because the home equity line has no equity in the house to hold onto, a motion can be brought "stripping" the home equity line.  If granted, upon discharge that lien would be removed from title and become unenforceable.

Protect Assets

The chapter 13 trustee doesn't have the power to sell your stuff, unlike a Chapter 7 trustee.  Instead, a pretend sale occurs, and you pay the cash equivalent to your creditors over the life of your Chapter 13.

For example, Sally owns a house worth $400,000, and has $50,000 in unexempt equity in it.  

In a Chapter 7, the Trustee would sell Sally's house to pay creditors and themselves.

In a Chapter 13, Sally would pay that $50,000 (less costs) back to her creditors over the course of her Chapter 13.  She might do that by refinancing, paying money from her income, or selling the house herself.  But she gets to make that choice.​

By stopping collection activity, the automatic stay gives you the breathing room to use a Chapter 13 to get back on your feet.