Chapter 13 bankruptcy is a process designed to give you a “fresh start” in situations where you can benefit by “curing” past-due mortgage debt, taxes and/or car loans while still “discharging” as much of your credit card debt, medical debt, and personal loan obligations as possible, including situations where you have too much income to qualify for chapter 7.
Like chapter 7 and other chapters of the Bankruptcy Code, we assemble a “petition” seeking relief and schedules which fully disclose your assets and liabilities, together with other financial information. And like other bankruptcy options, filing creates an “automatic stay” which prohibits creditors from taking any action to collect their debts from you, including foreclosing on your home. But chapter 13 differs from chapter 7 in important ways.
The hallmark, and purpose, of a chapter 13 case is obtaining “confirmation” (court approval) of a repayment plan which we help you design. We have a great deal of experience in crafting plans that work. A “perfect” chapter 13 case is one in which there was a negative financial event, like a period of unemployment, which is now over. But we understand that your financial reality may have ups and downs. Because chapter 13 is an entirely voluntary process you can give it a try, within reason. You maintain ownership and control of all your assets. And although chapter 13 technically requires “regular income” and is labelled a “wage earner reorganization”, it is available and may be a good fit for individuals with income from any source, including from small businesses, seasonal and “gig” income, and unemployment income.
You do have to be an “individual” to be eligible for chapter 13. That means you must be a real person (not a corporation, for example, but you can own a corporation or any other kind of business and still be eligible).
While chapter 7 eligibility is based on income, the amount you earn is no bar to chapter 13 eligibility. The eligibility test for chapter 13 is based on the total amount of your debt as of the filing date, instead. The debt limitations are revised periodically, but, basically, the current cutoffs are $419,275.00 of unsecured debt (such as credit cards, personal loans and medical bills), and $1,257,850.00 secured debt (such as mortgages). These are high ceilings, and that means almost anybody with a source of income can attempt to rehabilitate their finances through chapter 13. Keep reading for more specifics.
As in all other bankruptcies, the filing of a petition seeking relief under chapter 13 creates a stay (a temporary injunction) which prohibits the commencement or continuation of actions to collect a debt, or against your property. This includes foreclosure actions. So long as its interest is adequately protected in your chapter 13 plan the bank or other foreclosing party will not be able to obtain relief from the automatic stay to allow it to foreclose, and no unsecured creditor can sue you, or continue a lawsuit already begun. This gives you time to reorganize.
All individual bankruptcy filers must complete and file a statement of their monthly income based on the six-month period ending on the last day of the month immediately preceding the month in which the filing will occur. Although the means test computation in chapter 13 is very similar to chapter 7 it has a very different purpose. In a chapter 13, if your income is “under median” (in comparison with current U.S. Census figures for Connecticut), then you may not be required to repay any unsecured debt through your plan, and you can focus on other types of debt, e.g., reinstating your mortgages and bringing taxes current. If not, then the means test analysis will determine your disposable monthly income (“DMI”), the required amount to be paid to unsecured creditors. Such debt will be discharged after you complete the plan, and we will utilize all our skill to minimize such payments.
Developing and obtaining the bankruptcy court’s approval of your chapter 13 wage earner reorganization plan is the centerpiece of a chapter 13 case. The plan restructures your finances so that, upon completion, you will be current with loans secured by collateral you wish to keep (e.g., your house and car) while obtaining a discharge of the maximum amount of debt to which you are entitled. A chapter 13 plan does not have the flexibility of a chapter 11 plan (which is more suitable for businesses and those with higher debt levels). For example, a plan providing for periodic payments, as most do, must be completed within five years. However, chapter 13 provides many benefits and options that have enabled our clients to turn around a financial situation they thought was hopeless.
Perhaps the most common reason for filing chapter 13 is to reinstate a home mortgage that is in arrears. And the most common way of doing that is by means of a “cure and maintain” plan. In a cure and maintain plan you have the right to resume contractual installment payments, beginning with the next installment due after you file (if your mortgage loan has been accelerated the bank has probably stopped accepting payments, but they will once you file). You pay the mortgage arrearage as of the petition date (at zero interest) in monthly installments of up to 60 months. When you complete the plan, your mortgage will have been brought current and you will have saved your home. This type of plan works best when the mortgage default was caused by a period of unemployment or reduced income that was temporary, or when excessive credit card payments or medical bills (which can be eliminated or reduced through the plan) have impaired your ability to make the mortgage payments.
Second mortgages and “HELOCs” (home equity lines of credit) can also be reinstated by means of a cure and maintain plan. But if your home is “underwater” after taking the first mortgage into account, these liens may be avoided through your chapter 13 plan. Bankruptcy law allows this result only if the second mortgage does not have even a dollar of equity value. In this situation the loan would be treated as another unsecured claim through your plan. So, often, a formerly substantial mortgage obligation can be satisfied by zero or fractional payment. Upon completion of the plan, we file a court’s order on the land records which has the effect of releasing the second mortgage. Homeowners who utilized home equity lines of credit for improvements or to consolidate expenses prior to a decline or a stagnant period in the real estate market can often take advantage of this strategy.
If you own rental property (even if you live in part of it) which is underwater you can “cram down” the mortgage loan in your chapter 13 plan. That is, you may be able to reduce the total loan amount to the value of the real property and pay it off through your plan at an annual interest rate which is acceptable to the bankruptcy court (this varies, it is currently a little over 5%). As with a completely unsecured second mortgage, the balance of the mortgage is treated as an unsecured claim, which may receive zero or a fractional payment. This must be accomplished within the maximum sixty-month term of your plan, though. If that is possible, this option is a great advantage. Increases in the property’s value will be all yours.
A chapter 13 plan can also be a great vehicle for curing back taxes. While municipal property taxes must be paid at the statutory rate of 18% per annum, past due federal income taxes can be paid at 0%. Also, interest and penalties stop accruing when you file.
These might be at the root of your financial troubles. Sometimes the never-ending interest accruals and payment demands of these creditors are enough to cause people to default in their mortgage payments trying to keep up. For all the trouble they can cause, such unsecured creditors are far down the “totem pole” in bankruptcy law’s claims priority, are not entitled to very favorable treatment, and usually do not actively participate in bankruptcy cases, other than to file “proofs of claim”. You will be required to use your disposable monthly income (see above) to pay these claims. Again, however, we can often obtain confirmation of a plan which pays unsecured creditors zero or a fractional value, and we try to minimize the amount paid to unsecured creditors.
In all consumer bankruptcies you will be required to choose one of three basic options:
Chapter 13 provides some related options. You can redeem the car loan in full at a reasonable rate of interest from your ongoing income (that is, without obtaining a new loan) through the plan. If the loan balance substantially exceeds the value of the car you can bifurcate the claim into secured and unsecured components. The secured component is paid within the plan, at the completion of which you own the car free and clear. The unsecured component is treated like your other unsecured creditors (see above).
In most cases, student loans are not discharged in bankruptcy. But chapter 13 creates options. Many student loan lenders automatically defer payments until your chapter 13 case closes. If that is the case, or if a similar deferment already exists, there is no requirement that any portion of the loan be repaid through your chapter 13 plan. This may make your chapter 13 goals more feasible. If there is no deferment you have the option of making regular payments outside of the plan under the terms of the loan, or of paying the entire obligation through the plan.
Developing a confirmable plan along the lines discussed above is a process which typically takes a few months and, among other things, allows your creditors to file proofs of their claims by a deadline which the court sets, and gives us the opportunity to review and, if appropriate, object to them. We have many years of experience in developing plans that are workable and conform to the requirements of bankruptcy law, while using the same for your maximum advantage. The bankruptcy court must confirm the plan if it finds that it meets the requirements of that law. Although chapter 13 is always a voluntary process for you, once that occurs the confirmed plan binds your creditors. In this way, I believe chapter 13 affords a significant advantage over debt consolidation plans and the like. It will no longer be up to the creditors.