Chapter 13 Bankruptcy is a repayment plan bankruptcy lasting from three to five years depending on your household income. Most Chapter 13 bankruptcies are filed by people who earn too much money to qualify for Chapter 7. They will repay debts in Chapter 13 based on a mathematical formula called the “long-form means test” where certain deductions are taken off the household income and the end result determines how much debt must be repaid over a 5-year period. This formula can result in you paying back a small percentage of your debt over five years without interest accruing, without creditors harassing you, and with a full discharge of all eligible debts at the end of the repayment period.
Chapter 13 can also allow you to strip off a second mortgage permanently, lower the interest rate on certain vehicle loans, reduce the balance owed on certain vehicle loans and cram tax liens to the value of your personal property. It can also help you protect your non-exempt property from liquidation and can be used to make up missed payments (arrears) on mortgages and auto loans over three to five years even where the lender has stopped taking payments and is pursuing foreclosure or repossession.
If your income is above the median income for your household size in your state, the repayment plan filed in a Chapter 13 bankruptcy is typically based on the complex formula of the long-form means test (also used to determine eligibility for Chapter 7 bankruptcy). The formula starts with your average monthly household income and then allows you to take deductions from that income figure for numerous expenses, including: i) living expenses such as food, clothing, utilities, education and childcare expenses for children under 18, and ongoing medical expenses; ii) many payroll deductions, such as taxes, health insurance, term life insurance, and retirement contributions; iii) secured debt payments for your home and vehicle; iv) other reasonable and necessary expenses for the support of you and your dependents (ex., business expenses); and v) certain expenses which must be paid in chapter 13 bankruptcy, like certain kinds of tax debt and arrears on secured assets you plan to keep. Certain expense deductions are based on IRS standards for your household size while others are based on the amount you actually spend.
In general, if your income minus these allowed expenses yields a positive number, then you have ‘disposable income’ and you will pay this amount into your chapter 13 bankruptcy plan for 5 years. This money will go towards paying off your unsecured debt, such as credit card and medical bills. These debts do not need to be paid in full, they merely get what is left over after the deductions described above.
If your income is below the median income for your household size in your state or you have low or negative ‘disposable income’ because of relatively high expenses (ex., medical expenses, child support or alimony payments), then you may be technically eligible for chapter 7 bankruptcy but you may still choose to file a Chapter 13 for other reasons. Chapter 13 is often used by people who otherwise qualify for Chapter 7 because it allows you to strip off second mortgages in certain cases and can also allow you to make up missed mortgage payments over time to avoid foreclosure. Also, if you have non-exempt assets you would lose in chapter 7 bankruptcy, you can pay to keep them over time.
There are certain debts that must be repaid in Chapter 13 and these will be part of your repayment plan. Certain tax debts must be paid in full in Chapter 13, usually income taxes owed for the last four calendar years. Additionally, child support and alimony arrears must be paid in full over the life of the Chapter 13 plan.
You also must make regular payments on any secured debts you plan to keep, such as your mortgage and car loan. These payments tend to be made outside of bankruptcy, but can be made through the chapter 13 bankruptcy payment plan (ex., if you are able to reduce your car payment by paying through bankruptcy). In addition, if you have fallen behind on secured debt payments for assets you plan to keep, these arrears must also be repaid through your chapter 13 plan.
In general, developing the most advantageous Chapter 13 repayment plan for you requires expert legal advice. Chapter 13 bankruptcy is highly complex and adversarial. Wink & Wink has the experience, knowledge and skill to help you get the lowest payment possible in a Chapter 13 bankruptcy.
While Chapter 7 is the most used and preferred form of bankruptcy, there are some cases where filing a Chapter 13 bankruptcy makes more sense.
By removing a 2nd mortgage or home equity line of credit from your home – If the value of your home is worth less than you owe on your 1st mortgage and you have a second mortgage, home equity line or third mortgage on your home (“junior liens”), those junior lien may be stripped off in a Chapter 13 bankruptcy. This means you may be able to wipe out a second mortgage or HELOC in chapter 13 bankruptcy. Lien stripping is not available under Chapter 7 bankruptcy.
In chapter 13 bankruptcy, you can repay an auto loan through the chapter 13 bankruptcy payment plan. Most courts rule that you can do this at a very favorable interest rate. While this can help save money for you in chapter 13 bankruptcy (especially if you are in a high interest rate auto loan), you can sometime even reduce the balance to pay on your auto loan, or ‘cram down’ the loan.
In order to ‘cram down’ the amount owed on an auto loan, you typically must have had the loan for at least 2.5 years (910 days) and it is worth less than the balance on the vehicle loan. In such cases, you can cram down the balance owed on the vehicle to what it is worth when you file bankruptcy and pay that balance at a favorable interest rate through your chapter 13 bankruptcy payment plan. If you have not had your vehicle loan for 2.5 years, you may still be able to reduce the balance of your car loan to the value of the vehicle if the loan was not a purchase money loan (i.e., you owned the vehicle and took out a loan against it) or you acquired the vehicle for business use or for someone else’s use.
If you are behind on mortgage payments, back taxes or domestic support obligations, chapter 13 can enable you to pay these arrears as part of your 3 to 5 year chapter 13 bankruptcy payment plan. This can be particularly valuable for people who are facing foreclosure. When your home is in foreclosure, the mortgage lender typically will not accept partial payments. This puts you in the position of having to make up all missed payments at once in order to stop foreclosure. Chapter 13 can help people facing this impossible situation. It will stop foreclosure, enable you to cure the arrears through your 3 year to 5 year payment, and force the lender start accepting regular payments again (which you are responsible to make when saving a home in chapter 13 bankruptcy).
Sometimes a person qualifies for a Chapter 7 bankruptcy, but has a significant amount of non-exempt assets, such as a house with more than $60,000 worth of equity or large amounts of jewelry, that they would not be able to keep under a Chapter 7. In these cases, Chapter 13 is a better option because trustees in chapter 13 bankruptcy generally do not sell your property. Rather, you pay to keep your non-exempt assets in Chapter 13 bankruptcy. Spreading the amount to be paid over a 3 year to 5 year chapter 13 bankruptcy payment plan can help make keeping your property more affordable.
While child support obligations and alimony cannot be wiped out by any bankruptcy, other divorce settlement obligations not related to support, such as property division orders, can be discharged in a Chapter 13 bankruptcy. The distinction between support orders and property settlement is important and competent legal advice is necessary to determine if a divorce obligation fits this exception. Wink & Wink, P.C. can help you determine if this fits your situation.