If you are struggling to catch up on monthly payments on any debts you have incurred over time, an option that could be available to you is the possibility of filing for bankruptcy relief. By filing for bankruptcy, individuals can gain relief in different ways that can provide them with the opportunity to financially recover. The Bankruptcy Code is divided into different chapters to provide individuals with appropriate relief for their situations. Chapter 7 involves liquidating assets and property to pay off any outstanding debts. While this may be best suited for some, it is not the only option available. If you are hoping to retain more of your property and are financially able to do so, you may consider filing a Chapter 13 Bankruptcy instead. Unlike Chapter 7, Chapter 13 develops a repayment plan to pay off certain of your incurred debts during the span of 3 to 5 years.
Our team at Modesto Bankruptcy Attorneys has extensive experience in Chapter 13. Our team has over 18 years of legal experience and use that experience to attain the best possible solution for their Chapter 13 clients. Continue reading below to learn more about a Chapter 13 filing and whether or not it may be appropriate solution for your personal situation.
QUALIFYING FOR A CHAPTER 13
In contrast to Chapter 7, Chapter 13 is designed to ensure individuals with larger incomes also have an opportunity for relief. To initially be eligible for relief under Chapter 13 of the Bankruptcy Code, you must not have any debts exceeding a certain amount. Secured debts may not exceed $1,257,850. A secured debt is one where the person getting the loan (i.e. borrower) pledges to the person giving the loan (i.e. lender) an asset to be used as collateral for that specific loan. The most common secured debts are home loans (i.e. mortgage) and vehicle loans. If you purchase a home and use a mortgage for that purchase, the loan is secured to your home. This means that if you default on your obligation to repay that the loan, the lender has the legal authority to foreclose on your home. Furthermore, to qualify for relief, the unsecured debt limit currently sits at $419,275. Creditors do not have the right to take your assets as they do in a secured loan. Common examples of unsecured debt are credit card bills, personal loans, and medical bills.
Additionally, you must have a form of a steady income to complete the Chapter 13 process. Since the goal of Chapter 13 is repayment throughout a few years, you must be able to demonstrate to the Court that you will be able to make these monthly payments. This is done by filing a budget with the Court projecting your income and expenses. The income is shown on Schedule I and the expenses are shown on Schedule J. These forms are crucial to the success of your Chapter 13 case. These two forms will need to show that you have enough income to pay your reasonably necessary bills/expenses and still have enough money to pay your Chapter 13 Plan payment. For example, let’s say your Chapter 13 payment amount is projected to be $1,000.00 per month. Let’s also say that your income is projected to be $5,000.00 per month. If your necessary and reasonable expenses are shown to be $4,200.00 per month, the case would not work because $5,000.00 - $4,200.00 = $800.00. That is not enough to show that you can make the $1,000.00 payment in this example.
Regardless of which chapter of the Bankruptcy Code you file under, you must complete credit counseling from a U.S. approved agency before filing. This is meant to determine whether or not filing for bankruptcy may be beneficial to you. Upon completion, you will be given a certificate that you are required to file with the Court as part of your paperwork.
THE CHAPTER 13 PROCESS
Similar to a Chapter 7 filing, a Chapter 13 begins once you have filed your paperwork with the Court. This paperwork includes details regarding your personal information, income, expenses, incurred debts, and all other financial matters. It provides the Court with a background for your case and helps to build your repayment plan. Included in this paperwork is your Chapter 13 Repayment Plan that you have established with your attorney. The repayment plan outlines how you will pay your creditors, the amount they will receive, who will receive the payments, and how long they will receive payments. Here in the Eastern District of California, the first payment is due on the 25th of the month following when you filed your case. Thus, if you file your case on June 1st, your first payment is due on July 25th. If you file your case on June 30th, your first payment is still due on July 25th.
After the filing and prior to the 341 Meeting of Creditors (see next paragraph), you are required to provide certain financial documentation to the court-appointed trustee. This includes proof of your income, copies of your tax returns, copies of your bank statements, etc. This requirement is triggered by 11 U.S.C. § 521. As part of the detailed work that our office does for clients, we ensure that the proper documents are timely provided to the trustee to ensure continued success in your Chapter 13 case.
Moreover, generally within 30 to 45 days of filing the initial petition, debtors will attend the 341 Meeting of Creditors. Here, the court-appointed trustee will verify that all of the information you have provided with the Court is accurate and makes sense. Both the trustee and any creditors who choose to attend may ask you questions related to your financial matters which you are required to answer truthfully under oath. In addition to the trustee confirming the accuracy of the documents, they are also determining whether the Chapter 13 Plan that you filed is in align with all of the Bankruptcy rules. They want to confirm that not only you can afford the payments proposed, but whether you can afford to pay a higher amount. In most situations, the trustee will conclude the hearing after your testimony has been presented and you will not be required to attend another meeting.
Upon completion of the 341 Meeting of Creditors, the Court now makes the determination whether the proposed plan will be confirmed or denied. All creditors and the appointed trustee are now given a certain amount of time to file any objections to your plan that they see fit. If any objections are filed, both the debtor and the objecting party will be allowed to present their arguments to the Judge. Eventually, the proposed plan will be presented to the Judge along with any objections and replies filed in the matter. The Judge makes the final decision on whether the plan will be confirmed or not. The debtor has the ability to make changes to the plan according to the objections as well. Assuming the Judge confirms the plan, the debtor is now in a confirmed Chapter 13 case and continues to make the payments for the allotted period. Upon completion of the payments, the Court can then issue a Discharge as long as all of the requirements have been met.
WHAT TYPES OF DEBT ARE INCLUDED AS PART OF THE CHAPTER 13 PLAN?
Examples of debts that are paid through the plan include the following:
- Priority Debts
Priority debts must be paid fully through your plan. This includes certain debts regarding federal and state taxes, child support, or money owed to an employee.
- Secured Debts
Secured debts are any debts that are backed by collateral. An example of a secured debt is a car loan or home loan. If you fail to make payments on your car loan, the company that owns the vehicle has the right to take it back. Whether your secured debts will contractually end during the duration of your plan or not, whether you are current on the payments when the Chapter 13 is filed, and what you are ultimately determine how these secured debts get paid.
- Mortgage Arrears
Mortgage payments are to be paid in full as listed in the plan as long as yu are trying to keep the home. An exception may be made for any under secured junior mortgages.
- General Unsecured Debts
Unsecured debts are any debts that are not backed by any form of collateral. If you fail to repay any unsecured debts, you may default your obligation and could face a lawsuit by the creditor. An example of unsecured debt is credit cards or medical bills. Under your Chapter 13 repayment plan, you are not required to pay all of your general unsecured debts. The amount that you will be required to pay on the general unsecured debts is dependent on your disposable income, as well as the total value of all non-exempt assets. The general unsecured debts will receive anywhere from 0% to 100% of the total amount owed.
- EXAMPLE 1: A debtor's disposable income determines he/she must pay the General Unsecured Creditors $200 per month. Throughout the plan, a portion of the payment will be designated to pay $200 per month to the General Unsecured Creditors.
- EXAMPLE 2: A debtor’s disposable income determines he/she does not have any leftover money to pay the General Unsecured Creditors. Here, no money will be designated to pay the General Unsecured Creditors during the time of his/her plan.
- Administrative Expenses
During your bankruptcy filing, you will incur additional costs, including fees for both your attorney and the trustee, as well as the initial filing fee. These expenses could be outlined as part of your repayment plan.
HOW LONG DOES A CHAPTER 13 LAST?
Unlike Chapter 7, Chapter 13 Bankruptcy lasts for several years. This is because your repayment plan is designed to provide your creditors with scheduled payments. The plan is required to last for at least 3 years but cannot exceed more than 5 years. The only way to complete the plan in less than 3 years is by paying all of the required debt within that period of time. A major factor in the length of your Chapter 13 Plan is determined based on your income. If your income is less than the median income in your state, you would qualify to have a 3-year plan, whereas wealthier individuals may be required to be in their Chapter 13 Plan for the entire 5 years. By scheduling a plan over a longer time span, monthly payments could be lower than if they were part of a 3-year plan, making it more feasible to pay off debts.
Once you have completed all scheduled payments and no longer have an outstanding balance with your creditors based on the confirmed Chapter 13 Plan, you may proceed with having your case discharged. If you can prove to the Court that you have cleared all payments per the plan and have completed the discharge requirements, the Court will eliminate all remaining dischargeable debt and you will receive a discharge.
ADVANTAGES OF FILING A CHAPTER 13
Chapter 13 provides a unique form of relief that allows you to keep assets that otherwise would not have been available to you. The following are some of the benefits that may be available to you through a Chapter 13 filing:
- SAVING YOUR HOME
By filing a Chapter 13 bankruptcy, debtors can prevent a home foreclosure from occurring. If you are behind on home payments, Chapter 13 provides you with some time to catch up on the delinquency. Upon filing the initial bankruptcy petition, the Automatic Stay is enacted, under 11 U.S.C. § 362. The Automatic Stay will serve as a restriction on creditors to prevent them from collecting payments or enforcing liens, ultimately preventing a lender from foreclosing on your property. To prevent future foreclosure, you must pay back both delinquent and ongoing mortgage payments under your Chapter 13 Plan.
- STRIPPING A JUNIOR MORTGAGE
If you have multiple mortgages, a Chapter 13 may help eliminate any junior mortgages you may have on your home. Instead, the debt will be treated as a general unsecured debt. To do so, the debtor must first file a motion with the Bankruptcy Court pursuant to 11 U.S.C. § 506 to value the property. During this, the debtor must show the Court that the actual value of the property is less than the amount owed in the primary mortgage. If the Court is in agreeance with the debtor, the junior lien can be treated as unsecured and ultimately “stripped.” You would then treat the lien as you would any other general unsecured claims (i.e. credit cards). Once the Chapter 13 Bankruptcy has been completed, the creditor must remove his/her lien from the debtor’s property.
- SAVING YOUR VEHICLE
Under a Chapter 13 filing, you can make adjustments to your vehicle plan and make payments through the Chapter 13 Plan. Since the Plan lasts for 3 to 5 years, monthly payments will be a smaller amount since payments are now being made over a longer period. Interest rates may also decrease over this time.
- PAYING BACK TAXES
Bankruptcy usually considers most tax debts to be non-dischargeable. In other words, even if you receive a discharge, you are still legally obligated to continue paying off any tax-related debts. However, in a Chapter 13 case, debtors have the opportunity to include any priority taxes as part of the plan, allowing you to continue making payments throughout the time of the plan.
- CONTINUING TO RUN YOUR BUSINESS
If you own a business, a Trustee may require you to shut down your business if filing under Chapter 7. However, Chapter 13 Bankruptcy allows for debtors to keep businesses open and continue being able to run them.
- PREVENTING RISING DEBTS
A Chapter 13 filing makes it possible for certain secured claims to be reduced. For example, secured claims on vehicles and other personal property (i.e. furniture, electronics, etc.) can be reduced to their fair market retail value. The remaining portion of the claim would now be considered a general unsecured debt, which the debtor will not be required to pay.
- AVOID JUDGEMENT LIENS
Chapter 13 filings allow debtors to avoid facing any judgment liens. A judgment lien is placed when a creditor wins a lawsuit against you and attaches that lien to your property. This gives creditors access to equity on the property until your debts have been paid off. With a Chapter 13 filing, you will have the opportunity to prove your entitlement to the exemption and request the Court enter an order to prevent the lien from being placed, as per 11 U.S.C. 522(f).
WHAT IF I MISS A PAYMENT?
Since Chapter 13 runs over a longer period of time, it is not uncommon for financial changes to occur that may hinder your ability to make your payments as originally established. If your financial state changes and you miss a payment, you are not automatically dismissed from your plan. Instead, you may be able to modify your existing plan to reflect your new circumstances. In order to prevent any discrepancies with your plan, it is important to notify your attorney of any changes that may affect your plan.
If changing your plan does not seem like a viable option, there are other available measures. For example, you may be able to convert your Chapter 13 to a Chapter 7. However, your nonexempt property will no longer be protected and you can risk losing it through liquidation. This will help to eliminate your debts.
Although it is rare, another option is to request the Court issue a Hardship Discharge. The Court may grant a Hardship Discharge if you are faced with uncontrollable circumstances or you cannot afford to establish a modified plan. If granted, you will no longer be required to continue with your plan as established. However, your unsecured debts will only be eliminated if creditors have received at least the amount they would have received if you had filed under Chapter 7. In addition, you will still be responsible for your priority debts.
Lastly, you may decide to let the Court dismiss your current case and choose to file another Chapter 13 at a later time.
HOW CAN WE HELP?
Filing for bankruptcy relief can be a difficult time and is not an easy process. Contact our experienced team at Modesto Bankruptcy Attorneys today to speak with a Chapter 13 Bankruptcy Attorney and learn how the Bankruptcy Code can be utilized to help you during this difficult time. We will work together to determine whether a Chapter 13 filing is best for you, as well as your other options.
We help clients in the following areas: Modesto, Stockton, Turlock, Ceres, Empire, Escalon, Hughson, Lathrop, Linden, Manteca, Oakdale, Patterson, Ripon, Riverbank, Salida, Tracy, Waterford.