What is Chapter 13 Bankruptcy?
The most commonly filed bankruptcy in the United States is a Chapter 7 bankruptcy, with Chapter 13 being the second most commonly filed. A Chapter 13 is a reorganization bankruptcy for individuals or a married couple. Under this Chapter, you propose a plan in which you propose to repay a percentage of your debt to your creditors with the help and protection of the bankruptcy court. A typical Chapter 13 repayment plan will last for three to five years and the percentage paid to unsecured creditors varies from 0% to 100%. The person filing the case is called the debtor or debtors in the case of a married couple or “joint filing”. If you are married, you can file either alone without your spouse or together. While most people who file are employed and earn regular wages, the bankruptcy law allows self-employed people and even people who are only on a fixed income such as social security or pension file a plan. How much and how long your plan must be will be determined based on a few different factors including your monthly income, type and amount of your debt, as well as the value of assets you presently own. My goal is to help you put together an organized plan of repayment that you can easily afford.
My office has handled thousands of Chapter 13 bankruptcy cases in the Detroit bankruptcy court which covers all filings for nine counties surrounding Detroit, including Wayne, Oakland, and Macomb. Proposing a plan to your creditors, the trustee and the court takes a high degree of skill and experience. Your Chapter 13 plan will most likely be objected to by the Chapter 13 trustee and some of your creditors. My job is to use my knowledge and legal skills to have your plan approved or “confirmed” by your bankruptcy judge whereupon it becomes binding upon your creditors. Your job is to simply make payments pursuant to the plan and alert my office if there are any changes in your income so that we can make changes to your plan if needed. The entire time you are in your Chapter 13 bankruptcy case, you are protected by Federal law from actions by your creditors. At the end of your plan, whatever has not been paid to your creditors under the plan is wiped out or “discharged” by order of the court.
What is the difference between Chapter 7 and Chapter 13 bankruptcy?
The primary difference is that a Chapter 13 is a repayment plan whereas a Chapter 7 involves no repayment as your debt is simply wiped out by order of the bankruptcy court. In a Chapter 7 bankruptcy, a trustee is appointed to take and sell any non-exempt assets, but in 99% of my cases, there are no assets that are not protected by the bankruptcy exemptions. Most of the cases my office files, approximately 3 out of 4 or 75% are Chapter 7 cases, with the remainder Chapter 13. To be eligible to file a Chapter 7, you have to qualify and must basically show the court that after you pay your reasonably necessary monthly expenses, you do not have any money left over to pay your creditors and you are asking your bankruptcy judge to order your creditors to wipe out the debt and never again try to collect from you.
For most of my lower-income clients, individuals who make less than $45k or families who make less than about $60k per year, qualifying for a Chapter 7 is not an issue. Depending on your other circumstances, a Chapter 7 may even be possible if your income is higher than those base amounts. My office offers free consultations and can advise you if your income is too high to qualify for a Chapter 7 in which case a Chapter 13 would be your other bankruptcy option. A well-designed Chapter 13 plan will save you and your family thousands of dollars over the three to five year life of the plan while being under the protection of the court. Unlike a Chapter 7 case, in which a trustee can take and sell any non-exempt assets for the benefit of creditors, no assets are taken and sold in a Chapter 13 case.
When is a Chapter 13 a better choice than a Chapter 7?
A Chapter 13 bankruptcy will generally be preferable for a debtor who:
- is behind on a house or car payment and needs time in which to get caught up so that they can keep the asset. A Chapter 13 can stop the foreclosure and repossession and force the creditor to take payments.
- has too high an income and will not qualify for a Chapter 7 bankruptcy. My office will assist you with these calculations and determine if you might qualify for a Chapter 7.
- Simply wants to repay their creditors a fair amount, but simply needs court supervised assistance so that during the repayment period, creditors do not harass, file lawsuits or attempt to garnish wages or seize bank accounts or other assets.
- has significant assets such as equity in a home that may be exposed (not protected with the bankruptcy exemptions) in a Chapter 7 and thus may be sold by the bankruptcy trustee to generate cash to pay unsecured debt. In a Chapter 13, no assets are sold to pay creditors.
- is not eligible to file a Chapter 7 due to having filed an received a discharge in a prior Chapter 7 bankruptcy case within the past 8 years.
What is the difference between Chapter 13 and a debt management program through a credit counseling agency?
A Chapter 13 bankruptcy reorganization has many benefits as opposed to a DMP or debt management program through the private debt consolidation services you see advertised on television. When you file a bankruptcy petition, you have the authority and protections of the consumer bankruptcy laws behind you including the powerful automatic stay that prohibits creditors from taking action against you. Prohibited actions range from collection calls and letters to foreclosure, utility shut-offs, asset and bank account seizure and repossession. Furthermore, you are the one who proposes the terms of your repayment plan and are not at the mercy of the creditors who can simply opt-out of a debt management program. When the bankruptcy judge approves your plan, it is binding upon the creditors, they cannot opt-out. With private debt consolidation companies, you are at the mercy of the creditors’ wishes and have no real power against them.
What kind of debt can be included in a Chapter 13 bankruptcy case?
When you file a Chapter 13 bankruptcy plan, you can put any type of debt into your plan from unsecured debt such as credit cards and medical bills to secured creditors such as a mortgage or car payment. Other debts that are normally not dischargeable in bankruptcy can be included in your bankruptcy reorganization including student loan debt, child support and alimony, and criminal fines and restitution.
Do I have to pay all my debts in full in a Chapter 13 bankruptcy case?
No, in fact, most of my clients pay a very small percentage to their unsecured creditors. The law requires that you pay all of your disposable income to the bankruptcy trustee who then, on a monthly basis makes payments to your creditors pursuant to the terms of your plan for a three to five year time period. Your creditors will be paid according to their importance or priority in relation to each other. In the eyes of the bankruptcy system, some debts have a higher priority over others. Debts for child support and alimony and recently incurred income tax, because of their high priority generally must be paid in full under your Chapter 13 plan. For general unsecured debt such as credit cards, medical bills, payday loans and other personal loans, you only pay what you can reasonably afford and whatever is not paid at the conclusion of your Chapter 13 plan is discharged by order of your bankruptcy judge. Some of my higher income clients or those with significant assets will be required to pay creditors 100% during their Chapter 13 bankruptcy case, but will nevertheless benefit by doing so in a bankruptcy plan. A lot can happen during a 3 to 5 repayment plan that can affect income and expenses, such as job loss, divorce, birth of a child, illness, etc. Fortunately, the law allows you to convert a Chapter 13 bankruptcy to a Chapter 7. If you own a business, it is possible to run business while in a Chapter 13 Bankruptcy. For further reading see my blog post regarding how much will my Chapter 13 Bankruptcy plan payment be?