Let’s Learn About Chapter 13 Bankruptcy
(aka our ‘Debt-Survival’ plan)
Most of the bankruptcy laws are set forth in Title 11 of the United States Code, which is divided into chapters. For instance, there is Chapter 7 (sometimes called “total bankruptcy”, but that term is misleading), Chapter 13 (sometimes loosely referred to as the “bill consolidation” version of bankruptcy or a “wage earner plan”), Chapter 12 (bankruptcy for the family farmer), and Chapter 11 (bankruptcy for huge corporations).
The 2 chapters available to most people in need of help are Chapter 7 and Chapter 13. This post is going to cover Chapter 13.
The best way to do explain Chapter 13 bankruptcy is to compare it to Chapter 7. If you’re not familiar with Chapter 7 bankruptcy, click the link to read more information.
Filing bankruptcy under Chapter 13 can help you:
(click on the items to read more)
- Get rid of certain types of debt… permanently.
- Do things that cannot be accomplished by filing under Chapter 7.
- Get rid of “debt” stress and worry.
- Keep and protect property you want to keep.
- Get out from under debt on property you are willing to say “goodbye” to.
- Stop lawsuits, creditor harassment and garnishments.
- Free up income for your family.
- Get into a position to earn more money and save.
- Get started re-building your credit.
Make sure you read this Important Disclaimer.
We will also try to answer these 2 important questions:
(1) Gets rid of certain types of debt… permanently. This is huge. There is nothing else like it in the world. Chapter 13, like Chapter 7, gives you the right to get rid of most of the common types of unsecured debts, like credit card debt, medical bills, bank loans, finance company loans, and credit union loans. It can also get rid of unsecured debts left over from a divorce, a failed business, personal guarantees, trade creditors, and even certain income taxes over 3 years old… and the list goes on.
Chapter 7 generally lets you get rid of such debts completely. In Chapter 13, which varies a fair amount from state to state, may or may not require you to pay a portion of this debt. Under the new, improved bankruptcy law, we have found that many clients qualify to pay zero cents on the dollar, just like in Chapter 7. It turns out that the new “Means Test” isn’t all that mean, and that’s good news for good, hard working Americans who need help. Disclaimer: Results will vary depending on assets, debts, income and expenses, and not all clients will qualify to pay zero on their unsecured debts.
Chapter 13 gets rid of debt, but it can get rid of all that accumulating interest, too? Generally, just like Chapter 7, when you get rid of debt, you also get rid of the obligation to pay interest on that debt. From your own experience, you know that a huge portion of your payments goes just to paying interest. Not only do you get rid of the debt, you also get rid of all that interest.
This section would be better named: “Reasons to file Chapter 13 instead of Chapter 7.”
Why would anyone in his or her right mind file a bankruptcy under Chapter 13 which requires you to pay back a part of the debt, when you can file Chapter 7 and get released from all of it? That’s a good question, and here are 9 good answers:
- Chapter 13 may require less money “up front”: Chapter 13 does some things you can’t do in Chapter 7. In Chapter 7, all the attorney fees for the filing have to be paid up front. In Chapter 13, you are required to make monthly payments to a Chapter 13 Trustee – a bookkeeper for the Court who handles your case and takes your payments. The Trustee takes your payments and distributes money to your creditors. In Chapter 13, your attorney can get paid through your Chapter 13 plan, so that if the attorney chooses to do so, he can file your case and then wait to get paid by the Chapter 13 Trustee. This way, you can get your bankruptcy case filed with less money up front.
- You can get rid of a broader range of debts in Chapter 13: Chapter 13 of the United State Bankruptcy Code provides what is known as a “superdischarge”. Sometimes, depending upon the type of debts you have, the “superdischarge” can make all the difference. For example, you can get rid of debts, other than alimony and child support, you are obligated to pay by reason of a Separation Agreement or Court Order. Section 11 U.S.C. 523(a)(15) does not apply in Chapter 13.
- You can use Chapter 13 to “catch up” on a car, truck or house loan: You cannot do this in Chapter 7. In Chapter 13, the amount needed to catch up these types of loans is factored into your Chapter 13 plan, to be paid out the creditor over a series of months or years, depending on how the judges in your neck-of-the-woods interpret the law. In many local cases, this type of arrearage is generally set up to be paid back over the entire duration of the Chapter 13 plan. Chapter 13 plans generally range from 3 to 5 years in duration, which gives you plenty of time to bring these debts current. So, when you can’t catch up on these debts before filing bankruptcy, but you want to keep these kinds of property, Chapter 13 may be the way to go.
- You can file bankruptcy and still keep property, even if you do not have enough “exemptions” to cover it: The same exemptions apply in Chapter 13 that apply in Chapter 7. The problem comes when you have more property than you can protect with available exemptions. Chapter 13 may be the answer to the problem. Under Chapter 13 of the Bankruptcy Code, you can factor into your Chapter 13 plan payment enough money to pay over to the creditors this extra equity, which we call the “equity above exemptions” or “EAE” – and you can do so over the entire length of your Chapter 13 plan. This lets you file bankruptcy and still keep this valuable property.
- Chapter 13 stops foreclosures and repossessions: As we mentioned, you can catch up car, truck, and house payments using Chapter 13. However, this wouldn’t be of any help if, in the meantime, the affected creditor was allowed to continue on with efforts to foreclose on your house or repossess you car or truck. As long as you make your required Chapter 13 plan payments, these creditors are stopped cold and kept under control for the entire time you are in Chapter 13.
- Sometimes, you just have too much income to file Chapter 7: You might ask, why in the world would someone with lots of income be filing bankruptcy? Sometimes people mismanage the income they have. Sometimes emergencies suck away too much income. Sometimes the extra income is only newly acquired, as in cases where someone is out of work for a period of time. Those people who are able to hold off the creditors long enough to earn enough income to satisfy all the creditors usually do not file bankruptcy. For the rest, filing bankruptcy may be the only solution. The problem with Chapter 7 is that you are not eligible to file bankruptcy if you have too much income. Whether or not you have too much income to file Chapter 7 varies from Bankruptcy Court to Bankruptcy Court, depending upon the interpretation of different Bankruptcy Court judges. There is no clear “cut and dried” rule to determine this, but experienced bankruptcy attorneys know what will and will NOT fly with their local Bankruptcy Court judge. You have two choices: Either you do NOT file bankruptcy, or you file under Chapter 13. Under Chapter 13, you may consolidate your credit card debt into a payment based upon what you can afford to pay. Interest on your credit cards is wiped out. Thus, your payments are significantly reduced resulting in more money in your pocket.
- You can “strip off” a totally unsecured mortgage: You cannot do this in Chapter 7, but generally, this is allowed in Chapter 13. This can be a huge benefit. Let’s say, for example, that your house is worth $100,000, and that the payoff on your first mortgage is $105,000. Let’s also say that you have a second mortgage on your house for $20,000. In Chapter 13, you can file papers to “strip off” the second mortgage. The only requirement is that there is not a single dollar of house value to “secure” it and that you stay in your Chapter 13 case to completion. The benefit of this “stripping” is obvious. In our example, it not only gets rid of the mortgage debt, but equally important: it takes away the need to make monthly payments on this mortgage.
- The “Cram Down” Benefit of a Chapter 13 Bankruptcy: A major benefit of Chapter 13 bankruptcy is that it allows you to lower the amount that you owe on many “secured” debts. The ability to lower the amount is called “cram down.” This wonderful benefit is NOT available in Chapter 7, and it can save you a ton of money. It works like this: Secured debts are those debts where you have pledged as collateral things that you own, such as a car, truck, furniture, business equipment, or house. When you finance a car , truck or furniture, you typically make a number of monthly payments to repay the loan. In most cases, the value of the item you are financing decreases faster than the loan is being repaid. Most of the time, especially during the earlier years of your loan, the value of the collateral you pledged will be less than the payoff balance of the loan. This is known as being “upside down” on your loan.The “cram down” provisions in Chapter 13 of the Bankruptcy Code allow you to pay off these types of debts for less than what you owe. Instead of paying what you owe, you are allowed to pay only the value of the items serving as collateral. This can save a boat load of money, and allow you to get out from under some really “upside down” situations, while still keeping the property involved. For instance, let’s say you owe $10,000 on a car that is only worth $5,000. Under Chapter 13, you are allowed to get away with only paying the creditor the $5,000 value of the car, thereby “cramming down” on the creditor. In our example, the other $5,000 of the $10,000 debt is treated as an “unsecured” debt to be paid at pennies-on-the-dollar. You can’t do that outside of bankruptcy. The only catch is that the car has to be one purchased at least 2 1/2 years ago. The new bankruptcy law puts some limitations on your ability to achieve “cram down” on motor vehicles bought within 2 1/2 years before you file bankruptcy and upon other property bought within 1 year.
- You Can Reduce The Interest Rates On Most Secured Debts. Another great benefit of Chapter 13 bankruptcy is that you can reduce the interest rate that you have to pay on most secured debts (however, not with respect to the mortgage on your residence.). Many people have car or furniture loans where they agreed to pay interest at the rates as high as 15 to 30 percent, and sometimes even more. In a Chapter 13 bankruptcy, using Texas as an example, you only have to pay interest at the prime rate, plus 1 to 5 percent. What a savings when you consider that many secured loans charge you interest of 15% to 30% or more. The interest rate will vary depending on the jurisdiction you live in. But, going from 15 to 30 percent “outside” bankruptcy to about 8.25% “inside” bankruptcy can translate into huge savings.Just like with “cram down”, lowering the interest rate on loans can save a boatload of money, and this makes things more affordable and quicker to pay off.Once again, this benefit is NOT available in Chapter 7. Filing bankruptcy under Chapter 7 does some really great things. When it works, Chapter 7 is a great way to wash away credit card and medical debts – but Chapter 7 has no effect on your interest rates on secured loans.
- You can completely avoid the hassle, expense and risk of dealing with Reaffirmation agreements on vehicles you want to keep.
Getting rid of certain types of unsecured debts is important, but it’s mostly important because it helps you achieve an even more important goal. It gets rid of some, and hopefully all, of the stress and worry that comes with having to deal with crippling amounts of debt; not to mention that most clients save hundred of dollars per month in total monthly payments.
We have found that until people find out how bankruptcy really works, they believe there is nothing they can do to get rid of debt. They believe that they will be in debt for the rest of their lives… that there is no hope…. that with so much debt, their families will have to go without… that with so much debt, they will never get ahead….. and that they will never be able to buy anything again.
What a relief they feel when they come into our office and find out how bankruptcy really works. We cannot describe what a surprise this is for many people. For many, it seems like a dream come true. It is a dream come true, thanks to the wisdom of your United States Congress.
We have found that people generally don’t file bankruptcy to eliminate debt. They file bankruptcy to eliminate the stress of dealing with debt – that hopeless feeling of dealing with something that has gotten out of control. They want to get rid of that evil something that has taken over their lives and all their waking moments.
The look on many people’s faces when they find out how much debt and stress they can get rid by filing bankruptcy is almost comical. People deep in debt are so used to feeling stressed out, so used to worrying and feeling helpless – they don’t know how to act when they find out how much debt bankruptcy can actually get rid of.
When we tell them how much debt they can get rid of – permanently – and how easy it is to file bankruptcy, it’s like a heavy anvil is lifted from their chests. It doesn’t seem “real” to them. We have to keep assuring them that bankruptcy really works. For a while, they just go on saying things like “But I thought” this…or “But I thought” that, and we have to keep reassuring them that what we are telling them is true.
Giving people news that brings this kind of relief to people who have been struggling with overwhelming debt for months and years is what it’s all about for lawyers like us. We thrive on helping people.
(4) Keep and protect property you want to keep. For whatever reason, people think that if they file bankruptcy, they will lose everything that they have. Nothing could be further from the truth. Most of our clients keep everything they own and lost nothing. Why? Because there are these things called “exemptions.” In the occasional case where it looks like a client has too much “stuff” to cover with exemptions, Chapter 13 comes to the rescue. In Chapter 13, people can keep all their stuff; they just have to pay in a little more money.
Using Texas as an example, there are exemptions to cover lots of things including houses, mobile homes, land, cars, trucks, household goods and furniture, wages, life insurance cash value, personal injury and worker’s compensation claims, tools of trade, retirement plans, IRA’s, 401k and 403b accounts, and so on.
A big part of the process of analyzing a potential client’s case is making a determination as to what the client’s property is worth, so that we can figure out whether there are sufficient available exemptions to protect all the property. That is, we have to put a value on each piece of property. This is a fairly complicated, but extremely important, part of the process. The problem is, there are values and then there are “values.” For purposes of applying exemptions it is important to determine what we call the “liquidation” value as opposed to the listing value, the value to the client, what the client paid for the property, what the client would like the property to be worth, etc. For purposes of applying the “cram down” provisions, we have to determine “replacement” value.
Filing bankruptcy does NOT mean you get to keep the property for free. If there is a lien against the property, as in the example above with the house, the creditor holding the lien still needs to be paid. In our house example above, equity is no problem, but the client, if he or she wants to keep the house, would still have to keep current on the $105,000 mortgage.
The same would apply for a car loan. Generally, when you get a car loan, you give the lender a lien against your car title. However, for purposes of Chapter 13, there is one absolutely huge difference – the “cram down.”
The All Powerful “Cram Down” Provision: Cram down is a right you have whenever you file a case under Chapter 13 of the Bankruptcy Code. It allows you to pay less than what you owe on certain cars, trucks, business equipment, and mobile homes, assuming that the value of the items is less than the amount owed. This is a very complicated issue and subject to great variance in interpretation from Bankruptcy Court to Bankruptcy Court. Nevertheless, this can translate into huge savings for you. Along with the other benefits of filing bankruptcy, this can make all the difference between ending up with a Chapter 13 plan you can afford and one that you cannot.
(5) Get out from under debt on property you are willing to say “goodbye” to. Chapter 13 can help a client get out from under the certain property and the debt associated with it. For instance, let’s say you own a mobile home that is worth $15,000, but you owe $25,000 on it. You have tried unsuccessfully to sell it, but the people who want to buy it cannot get approved for the financing to complete the sale. Unless you can figure out a way to get rid of the mobile home and the debt owed on it, you are stuck. Chapter 13 bankruptcy can provide a solution.
As part of the bankruptcy, you “surrender” (give back) the mobile home to the person or company that holds the lien against the mobile home. In our example, the person or company that is owed $25,000. Once you do this, they have a right to sell it. Outside of bankruptcy, once they sold it, they would come back at you to collect any money they did not get from the sale. In our example, if they sold it for $15,000, you would still owe them for the residual $10,000. In Chapter 13, after you surrender property back to a lender, all that’s left is an “unsecured” claim against you – and all that generally has to be paid on unsecured claims is pennies-on-the-dollar, and NO interest. Problem solved.
The same result can also generally be achieved with respect to other types of property you want to get rid of.
Disclaimer: Results will vary somewhat, depending on the jurisdiction where you live and on your particular assets, debts, income and expenses.
(6) Stopping Lawsuits and Creditor Harassment. One of the most powerful things about Chapter 13 is the “automatic stay.” Immediately, when a client files bankruptcy, the client gets bankruptcy protection. The Court immediately issues an order to all creditors demanding that the creditors leave the client alone. This order is what is called the “automatic stay.”
If a creditor does NOT comply with this order, the Bankruptcy Court has the power to punish the offending creditor severely. Most creditors know this and take steps to quickly comply with the order. Included in the duties imposed on the creditor is the duty to stop all collection calls, to stop writing collection letters, to stop all lawsuits, and to stop all garnishments for at least taxes and student loans. Thereafter, and for the duration of the Chapter 13 case, if the creditor feels it has the right to do something, the creditor must make a formal application to the Court. Since Chapter 13 cases are generally 3 to 5 years long, this is powerful medicine for keeping otherwise aggressive creditors at bay. By having to make a formal application to the Court, the Court is in the position to make sure you get the protection you need and deserve.
At the end of your Chapter 13 case, the automatic stay expires – but in most cases, it doesn’t matter. With respect to all the debts that get “discharged” (which means “gotten rid of”), the Automatic stay is immediately replaced with a “permanent” order to protect you. This order is called the “permanent injunction”. In addition, many of your secured debts will have been paid off during your Chapter 13, so that you no longer need the protection of the automatic stay.
At the end of your Chapter 13 case, creditors with “non-dischargeable” debts, like alimony, child support, and student loans can take up where they left off. The good news is that if you got rid of enough other debts in your bankruptcy case, you will now have more income and you will be in a better position to deal with these residual “non-dischargeable” debts.
(7) Free up income for your family. The goal of getting rid of some debts and paying less on others is that you don’t have to pay out as much of your income on those debts. This relieves stress and lots of it. By filing bankruptcy, most of our clients lower their total monthly expenses by hundreds of dollars per month. This is huge because it frees up substantial amounts of income to take care of other more important things, such as normal monthly living expenses. This means that you will be in a better position to take care of your family.
Not filing bankruptcy can mean you get “stuck in neutral” or worse, “stuck in reverse.” Filing Chapter 13 bankruptcy and getting rid of some of the burden of debt generally means that you and your family can start moving forward again. A second chance at a fresh start – it doesn’t get any better than that.
(8) Puts you in position to earn more money and save. For most people with mounting bills, it usually ends up being a situation where you have to “Borrow from Peter to Pay Paul” just to stay current. For most people, not filing bankruptcy means that the more you earn, the closer you get to breaking even each month. Forget about saving for a rainy day. The worst comes when you don’t earn enough and you can’t borrow any more money from Peter to pay Paul. Then, you’re in big trouble.
Filing bankruptcy solves a lot of these problems. With Chapter 13, you can get rid of enough debt so that you can live on what you earn. This is the first step. The second step is to finish your Chapter 13 plan. The third step is to earn more money, but without having to use all of it just to stay current. If you get rid of enough debt in bankruptcy to really make a difference, then you should be able to start saving money – especially as you get wage increases or promotions in your job. Wouldn’t that be nice?
(9) Get started rebuilding your credit: Filing bankruptcy is the first step. In Chapter 13, filing bankruptcy gets rid of certain debts and lowers payments on others. The second step is to bring your Chapter 13 plan to a successful conclusion. This can take a while, but in the meantime, your creditors are kept under control. The third step is to start saving some money. Many clients get so much relief from filing Chapter 13 that they are actually able to start saving money while they are still in Chapter 13. These are 3 important steps that need to be taken in order to re-build your credit.
If you have gotten to the point where you need to file bankruptcy, your credit is very likely messed up, maxed out and probably dead. The first step in rebuilding credit is to get rid of some debt. To do this, nothing works better or faster than bankruptcy. A Chapter 7 bankruptcy is the fastest way, but the second fastest way to get out of debt is Chapter 13. Anything is better than trying to pay off debts you can’t afford. At the end of your successful Chapter 13 case, all of a sudden, you have less debt. Assuming everything else in your life holds together – you keep your job, you don’t get divorced, there aren’t a lot of emergencies, and you get the normal raises and promotions you deserve – you can start saving some money. Saving money gives you the necessary down payment for buying new things… and on and on you go in the process of rebuilding your credit.
In addition, by getting rid of some debt, your debt to income ratio starts looking better. Over time, you have more money in the bank from saving money on income no longer ravaged by bills. And then, naturally and gradually, you start to attract the attention of more and more willing lenders. And why not? You are now in the position to handle more credit. At this point, life is starting to look good again and you are well on your way to rebuilding good credit… in no small part because you made a smart decision to file bankruptcy.
(10) Important Disclaimer. The bankruptcy laws are extensive and complicated. As a consequence, most good bankruptcy attorneys do nothing but bankruptcy. It is a full-time job to keep up on the bankruptcy laws, exemptions laws, and procedures, while at the same time serving all the other needs of our clients. We mention this because – although all of the information mentioned above is true, in many, if not most, circumstances – (1) Results will vary depending on your goals, assets, debts, income and expenses, and (2) Because it was necessary to oversimplify the information and the conclusions in order to make important points. The simple truth is that you cannot become an experienced bankruptcy attorney or learn enough to become knowledgeable enough to file your own bankruptcy case by simply reading the material on this or any other website. Anyone that would have you believe otherwise is simply lying to you for their personal gain or fooling themselves. The information on this website is simply meant to introduce you to important concepts about bankruptcy and to let you know the truth: That bankruptcy does NOT work the way you think or the way you have always been told. The best advice I can give you is to set up a consultation with the most experienced bankruptcy attorney you can find. We offer a totally FREE initial consultation, so you can learn about all your rights and all your options – bankruptcy and otherwise – and so that you can get fast answers to all your questions about debt and how to deal with it.
(1) What does it cost to file under Chapter 13? The attorney fees in a Chapter 13 are set by the Bankruptcy Court. In the Northern and Eastern Districts of Texas, the attorney fees are $3,000. You do not have to pay this up front. Most of the attorney fees are paid through your payment plan in your Chapter 13 plan. The filing fee for Chapter 13 is $274.
(2) How fast can I get relief? We cannot speak for other attorneys… but our answer is this: In most cases, we work as fast you pay us and provide us with the documents and other information necessary to draft the schedules required to file your case. If need be, your case can be filed in as little as a week. In an emergency, to avoid repossession or to stop a foreclosure, we can free up staff to get a case filed in less than a day.