With this type of bankruptcy, the debtor pays toward their debt through a payment “plan” over a 3 to 5 year period. There is no “liquidation” in a Chapter 13 bankruptcy, so there is no chance the debtor will lose their property they own at the time of filing. In fact, this is a common reason individuals choose to file a Chapter 13 over a Chapter 7—because they have an asset they do not want to lose, that they would otherwise lose if they filed a Chapter 7.
The amount of your payment plan varies from case to case and is often dependent on your assets, your income, and the kinds of creditors you have.
Chapter 13 Bankruptcy Defined
Chapter 13 is not voluntary on the part of the creditors. Creditors have no choice as to what you do or do not do so long as your bankruptcy plan complies with the bankruptcy laws. You are also under automatic stay protection while you are making payments.
Chapter 13 is not a debt consolidation: it is a re-organization. It is possible that you pay only 5% of your debt back and receive a discharge on the remaining 95%. This is very different from Consumer Credit Counseling.
Chapter 13 deals with all debts, not just unsecured debts. Therefore, house payments, car payments, taxes, student loans, credit card debts, and medical bills are also paid through the Chapter 13 plan.
Payments are made in a Chapter 13 bankruptcy while under court-ordered protection from your creditors. This means that all garnishments, levies, repossessions, foreclosures, and all other forms of creditor activity are stopped as of the filing date of the bankruptcy petition and remain stopped as long as your are in compliance with the plan and the bankruptcy code.
Excessive Disposable Income—after paying your regular monthly expenses, you have money left over with which to pay your unsecured creditors
Substantial Non-Exempt Equity in Assets That You Wish to Retain—you own assets that you would otherwise lose in a Chapter 7 bankruptcy that you do not want to lose (for example, your equity in the asset exceeds what you are allowed by law to keep). In a Chapter 13 bankruptcy, you are a debtor in possession and continued legal and equitable ownership of all your assets so long as you are making a plan payment to a Chapter 13 trustee.
Significant Non-Dischargeable Debts—these are debts for which you would not receive a discharge in Chapter 7 bankruptcy. These include child support, income taxes, student loans, criminal restitution, government penalties, damages for willful or malicious injury, bad checks, and money obtained by false pretenses.
Prior Chapter 7 Bankruptcy Filing Within Six Years—if you have received a discharge in Chapter 7 bankruptcy within six years, a Chapter 7 bankruptcy is not available to you. Therefore, you would file a Chapter 13 bankruptcy since the six-year waiting period does not apply in Chapter 13 bankruptcy.
Default on Debt Collateralized by Important Asset—if you are significantly behind on secured debt that is collateralized by a house, car, or other significant asset that you wish to keep, Chapter 13 bankruptcy is appropriate. A Chapter 7 bankruptcy does nothing to help you cure defaults on secured debt.
Future Recurring Un-Reimbursed Debts—if you are expecting a debt to occur in the future that is not expected to be paid or reimbursed (for example, the birth of a child or continuing medical treatment for which there is not full insurance coverage), a Chapter 13 bankruptcy is a good option because is preserves your ability to file a Chapter 7 bankruptcy at a later date or to dismiss and re-file including the new un-reimbursed debt.
Co-Debtor on a Personal Debt—if you file for Chapter 7 bankruptcy, your creditor will go after the co-debtor for payment. In a Chapter 13 bankruptcy, the creditor will generally leave the co-debtor alone. There are some very specific rules that apply to this situation.
Results of Bankruptcy
The Process of Declaring Bankruptcy
What if I do not want my house or car loan creditors notified of the bankruptcy?
This is not possible. These creditors are required to be listed as debts in your bankruptcy schedules. These creditors will, therefore, receive notice from the Bankruptcy Court. It is important to recognize that bankruptcy does not prevent you from repaying any debt. Typical debts that debtors continue to repay after filing are house loans, car loans, dentists, doctors, and credit unions.
While In Bankruptcy
Cram Down Method—Suppose that the value of your automobile is $10,000 but you owe $16,000 on it. In Chapter 13 bankruptcy, you have the ability to cram down the secured portion of the amount owed to the value of the collateral (in this case, $10,000) and pay the balance owed, if at all, as unsecured debt.
Stretch Out Method—Suppose that you owe $5,000 on an automobile at regular monthly payments of $350.00 per month. In Chapter 13 bankruptcy, you have between 36 and 60 months to repay the debt owed, even if the value of the collateral is more than the amount owed. Thus the car payment can be stretched out over 36 months, effectively lowering the monthly payment to $150.00. The ability to “refinance” your secured loans through Chapter 13 is sometimes the only way to have enough cash flow to keep your property.
Discrimination Due to Bankruptcy
Utility companies cannot discontinue service or refuse to provide you services because of a bankruptcy. They can, however, require you to pay a reasonable deposit. This is normally construed as an amount twice the amount of your average monthly bill.
You may not be discriminated against in obtaining future student loans on the grounds that you filed bankruptcy or failed to pay a student loan that is discharged in bankruptcy.
In Chapter 13 bankruptcy, you are actually in bankruptcy for 3 to 5 years. This means that the point at which you are allowed to begin re-establishing credit is postponed for 3 to 5 years since you are not allowed to incur new debt in a Chapter 13 bankruptcy.
Creditors tend not to be sophisticated enough to distinguish between a bankruptcy that repays creditors (Chapter 13) and one that does not (Chapter 7). Creditors do not give special credit for repaying debts in a Chapter 13 bankruptcy.
If the Chapter 13 bankruptcy fails, all debts continue to be owed less the amounts paid into the plan. Creditors will use the amounts still owed against you when attempting to establish new credit.
You should stop using your credit cards. If you borrow money with the specific intent of discharging the debt in bankruptcy rather than repaying it, the debt is not dischargeable. For example, certain luxury purchases over $1,000 made within 60 days of the bankruptcy filing are not dischargeable. Cash advances aggregating $1,000 made within 60 days of the bankruptcy filing are not dischargeable. Debts involving materially false financial statements are not dischargeable.
You should not transfer your assets to friends, family, or business associates to protect the assets from your creditors. The transfer may be considered a fraudulent conveyance. If it is, you may lose both the property and your right to a bankruptcy discharge.
You should not destroy any business or financial records. If you do, you can lose your right to a bankruptcy discharge.
You should carefully choose the creditors you do pay. Some creditors (for example, landlords, secured creditors, and some utilities) should be paid under most circumstances. Conversely, if you pay a credit card debt that will eventually be discharged, you may be throwing money away. Your attorney will advise you on which creditors to pay.