Chapter 13 Bankruptcy
Chapter 13 Bankruptcy
Myth: Filing Chapter 13 bankruptcy won’t allow me to discharge my debts.
Fact: In fact, the rules concerning the discharge of debts in bankruptcy are more liberal in a Chapter 13 bankruptcy case than in a Chapter 7 bankruptcy case.
What is Chapter 13 bankruptcy?
Chapter 13 is a debt repayment that allows you to obtain relief for many types of debts. Under a Chapter 13 repayment plan, a bankruptcy attorney will help you create a plan to pay back a percentage of your debts over three to five years.
A Chapter 13 payment plan must offer to pay the full amount of all priority claims and all secured claims such as your home where the value of the collateral is greater than the amount of the debt. This means full payment all principal, plus all accrued interest and penalties due through the date the bankruptcy case is filed. The Chapter 13 bankruptcy plan must also agree to pay post-bankruptcy interest at the current market rate.
All general unsecured claims must be treated equally, and will receive a pro-rata share of any leftover funds. The Chapter 13 plan must propose to pay general unsecured claims between 0 and 100 percent of the claim amount, depending on how much you can afford to pay.
If your budget shows that you cannot afford to pay any portion of the general unsecured claim, the plan may propose a 0 percent payout. If the budget shows that you can afford to pay some or the entire general unsecured claim, the plan must propose to pay the full amount you can afford to pay.
Your disposable income determines how much of the pre-filing debt must be repaid. All tax claims not classified as “secured” or “priority” claims are classified as “general unsecured” claims.
How is my disposable income determined?
Your disposable income will be determined by the bankruptcy judge’s assessment of what living expenses are necessary and reasonable for you and your family.
Many of the expenses that are allowable in Chapter 13 are for things that you may not have been able to provide for your family because you are struggling to pay credit card debts. Here are a few examples:
- Health insurance
- Life insurance
- Disability insurance
- Long-term care insurance
Essentially, Chapter 13 bankruptcy gives you the choice of either paying credit card debts with interest rates approaching 30 percent per year or providing for your family’s financial security.
When should I file Chapter 13 bankruptcy?
Chapter 13 bankruptcy may be the proper option if you are behind on home mortgage or vehicle payments and want to keep the property. It can also be a good option if you want to alter unfavorable terms of a loan agreement.
Filing Chapter 13 bankruptcy allows you to stop foreclosure on your home and arrange to pay the arrearage over three to five years.
A Chapter 13 repayment plan may also allow you to lower vehicle payments by reducing the debt to the value of the collateral, reducing the interest rate, and extending the term of the loan. Suppose you had a vehicle loan that you obtained three years ago and you have two years left to pay on the loan. Let’s also assume he payoff amount is $20,000 and the interest rate is 18 percent. If the market value of the vehicle is $10,000, you can propose a three-year bankruptcy plan that pays $10,000 at a lower interest rate. If accepted, the creditor must transfer the title free and clear of the lien after all payments under the plan have been completed.
Chapter 13 bankruptcy can also be used to reorganize a small business. In business cases, a debtor can repay debts (or arrearages on loan payments) in installments over three to five years. A small business owner may also use the “cram down” provisions of the bankruptcy laws to reduce installment payments and the interest rate paid on secured debts. A small business owner can also use Chapter 13 to selectively reject unfavorable contracts or unexpired leases.
Discharge of debts in a Chapter 13 bankruptcy
The rules concerning the discharge of debts in bankruptcy are more liberal in Chapter 13 bankruptcy cases than in Chapter 7 bankruptcy. A Chapter 13 discharge is commonly known as a “super discharge” because certain debts can be discharged in a Chapter 13 case that cannot be discharged in a Chapter 7 bankruptcy case.
The laws concerning the Chapter 13 bankruptcy super discharge are complex and have changed recently so you should consult a bankruptcy lawyer if you think you may qualify.