What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy allows you to reorganize your debt. This is the bankruptcy option for you if you are temporarily unable to pay your debts, but would like to pay them in installments over a period of time.
The biggest difference between Chapter 7 and Chapter 13 is that a Chapter 13 takes longer, and debts are not discharged. They are repaid in monthly installments over a period of years. Filing any bankruptcy chapter is a big decision, so you should ask your bankruptcy attorney to learn about the options available to you. Call the Law Office of Diane Anderson today.
How Do I Know Whether Chapter 13 Bankruptcy Is Right for Me?
This type of bankruptcy is the best option if you are behind on secured debts, but you want to keep the collateral. It is also a good option if your income allows you to make the monthly payments. Your attorney can review your income, assets, and taxes with you to help determine whether Chapter 13 is right for you.
If You Fail the Means Test
If your income is too high to file a Chapter 7, you have no choice but to file a Chapter 13. In recent years, the courts have made it much more difficult to qualify for Chapter 7. Now, debtors must pass the means test if their income is more than the median for their state.
The means test takes into consideration your monthly expenses, such as:
- mortgage loans
- car payments
- child care
It then places them in a formula that will determine whether you pass or fail the test. If you want to file Chapter 13, you have to make sure that you make enough income to make the monthly payments. Missing a payment can cause the court to dismiss your case.
Eligibility for Chapter 13 Bankruptcy
Before you file for Chapter 13, there are a number of considerations that you must make. If you failed the means test for Chapter 7, Chapter 13 is not your only option.
In order to qualify for Chapter 13, your secured and unsecured debts cannot exceed a specific amount. If your debt burden is too high for Chapter 13 and you make too much money for Chapter 7, you can still file for Chapter 11.
As of 2016, the debt limits for Chapter 13 are:
- $394,725 in unsecured debt
- $1,184,200 in secured debt
If you owe more than that you cannot file for Chapter 13 bankruptcy.
Since Chapter 13 bankruptcy simply reorganizes your debt, you’ll have to prove that you can actually make the necessary payments while simultaneously meeting your monthly obligations for rent, utilities, and self-support.
In other words, if you can’t repay the debt according to the plan under Chapter 13, then there’s no real sense in reorganizing it.
If You Want to Protect Your Assets
A Chapter 13 bankruptcy allows you to keep all of your property. This is a benefit that Chapter 7 does not provide. In a Chapter 7, most of your debts are discharged. However, you may have to surrender assets that are not covered by bankruptcy exemptions. In a Chapter 13, you have to repay your debts. However, you get to keep your assets.
And if you do have to buy back assets you couldn’t fully exempt, you have some time to do so, since a Chapter 13 is a three to five-year process. That means that the monthly payments will be easier to handle since they are spread over several years.
If You Want to Save Your Home
You have a much better chance of keeping your home if you file a Chapter 13. Your bankruptcy attorney can inform you mortgage mediation programs that can help you work something out with the creditor and protect your home from foreclosure. Here, again, the three to five-year timeline of a Chapter 13 bankruptcy gives you time to repay the balance owed on your mortgage.
If You Owe Taxes
If you can’t discharge your taxes under a Chapter 7, a Chapter 13 may be a better option for you. It can save you a significant amount of money because it could toll any interest owed during the bankruptcy.
If You Don’t Qualify Under Chapter 13
If you’re unlucky enough to make too much money to file for Chapter 7 and owe too much to file for Chapter 13, then your last recourse for discharging your debts is filing for Chapter 11.
Chapter 11 was designed for corporations, not individuals. Nonetheless, there’s no law that says individuals can’t file for Chapter 11. The reason why individuals don’t file for Chapter 11 is that it has a tendency to be very expensive.
Not only are court costs more expensive than Chapter 13, but it’s an incredibly laborious and time-intensive process for your lawyer. Legal fees can be very steep as well.
It’s also true that Chapter 11 bankruptcies result in a successful reorganization that sees the debtor paying off their debt somewhere between 10% and 15% of the time. Once the debtor defaults on the bankruptcy their case could be converted to Chapter 7 and their assets are liquidated.
In other words, after failing to qualify for Chapter 7 or Chapter 13 and being forced into a costly Chapter 11, the court can decide there is no hope for repayment and convert your bankruptcy to a Chapter 7.
What Is the Difference Between Chapter 13 and Debt Consolidation?
Some folks might be reading this wondering how Chapter 13 bankruptcy differs from debt consolidation.
Firstly, debt consolidation is a good option for some people. Essentially, what you are doing with debt consolidation is paying off all your debts by taking out a new loan. In other words, someone has to be willing to buy up your debt and then become your primary creditor. That is not without risk.
Chapter 13 bankruptcy, however, has zero risk to any new creditor. Your debts are essentially reorganized in a manner that makes them manageable. You don’t pay interest on Chapter 13 debts. That, however, comes with a consequence. The bankruptcy will stay on your credit record for the next 7 years and you will have to rebuild your credit and your reputation in the eyes of potential future creditors.
The major benefit of debt consolidation is that all of your debt is owned by a single creditor. They offer you a fixed interest rate, hopefully, a lower interest rate, and you only need to make the one payment. On top of that, as you make the payments, you are actually improving your credit. That is not the case with Chapter 13 bankruptcy.
A bankruptcy attorney can help you make the right choice as you try to manage your debt. It’s an option that has saved some individuals from filing for bankruptcy.
What If My Income or Circumstances Change?
Let’s say you’re making your Chapter 13 bankruptcy payments but you hear bad news from the boss. Sales aren’t great and everyone’s hours are being reduced. Now, you’re going to struggle to make your Chapter 13 payments. Does that mean that you’re out of the plan?
Not necessarily. If your circumstances change through no fault of your own, then generally the court is willing to work out a payment plan that works for you.
In some cases, the court may allow you to discharge your debt for hardship. For instance, you are making your payments, but suddenly you contract a serious illness.
If you’re neither seriously ill nor capable of making your payments, then the court may consider converting your debt to Chapter 7. Your debts would be discharged but your property would be liquidated.
The last option available would be to dismiss your Chapter 13 bankruptcy entirely. The major negative here is that you would owe back interest on debts that you began paying off when Chapter 13 froze your debt. You’d also, of course, still owe the outstanding balance.
Contact Our Bankruptcy Attorney
Chapter 13 bankruptcy is complicated. With any bankruptcy filing, there is a lot at stake. Before making a decision about which chapter to file, make sure you enlist the help of a legal professional who can analyze your case and recommend an option that will work best for you. Call the Law Offices of Diane Anderson at (530) 317-5556 | (209) 881-9222 today for a consultation.