Chapter 13 Bankruptcy

The other common type of bankruptcy is Chapter 13 bankruptcy.  This is also called “wage earner” bankruptcy, because you must have a regular source of income in order to file for Chapter 13 bankruptcy.  This is because in Chapter 13 bankruptcy, you are repaying your debts over time, based on a repayment plan, rather than wiping them all out, as in a Chapter 7 bankruptcy.

Reasons for Chapter 13:

  • You want to stop a foreclosure or a repossession in order to repay the arrears over 5 years.
  • You do not qualify for Chapter 7 because you earn too much income (you failed the Means Test).
  • You do not qualify for Chapter 7 because you have assets worth more than the exemption limits and you do not want to liquidate those assets.
  • You want to “strip off” a second mortgage because the house is so far under water that there is not even enough equity to pay the first mortgage in full.
  • You previously filed a Chapter 7 and received a discharge less than 8 years ago, but now need protection from your creditors.
  • You want to surrender an investment property that’s completely under water back to the lender.
  • You need a mortgage loan modification.

In a Chapter 13 bankruptcy, you make a plan to pay back in monthly payments all or a portion of your debts over a three to five-year period, depending on your income. The minimum amount you will have to repay on your debts will depend on a few factors, such as how much money you make, how much money you owe, the type of debt (secured or unsecured), and whether your unsecured creditor would be paid more if you filed for a Chapter 7 bankruptcy instead.

Secured means that the debt is secured by some form or collateral or property, such as a home mortgage debt that is secured by a house or apartment or a car loan that is secured by a car.  Unsecured means a debt that is not secured by some form of collateral or property, such as most credit card debt.

If you do not have regular income or your income is too low, the court may not allow you to file Chapter 13.  You must earn enough money to repay some or all of your debt.  Also, if you have too much debt, you may not be able to file for Chapter 13 bankruptcy, but these limits are high – over $1 million in secured debt and over $300,000 in unsecured debt.

During the repayment period, the automatic stay applies (that is a like a legal “Stop Sign” or “force field” that comes into play once you file for bankruptcy), and your creditors will not be allowed to try to collect on the debts that are part of the repayment plan.  You will not even have any direct contact with your creditors during the Chapter 13.

Advantages of Chapter 13 bankruptcy

Chapter 13 bankruptcy allows you to keep your property and continue making payments on any loans or other debt you have.  It also gives you the chance to save your home from foreclosure, because it allows you to stop foreclosure proceedings and catch up any past due payments over time in your repayment plan. Also, Chapter 13 allows you to catch up on your payment schedule for other secured debts, like car loans, and extend them over the period of your repayment plan, which could lower your monthly payments.  Chapter 13 can also protect the interests of people who may be co-signers on your loans or other debts.

Also, if you have a second mortgage that is completely unsecured, the court will allow you to re-classify it as unsecured debt and it can be paid like any other unsecured debt under the plan, pennies on the dollar. This relief is not available in Chapter 7.

You can also ask the court to supervise an application for a mortgage loan modification in Bankruptcy Court, this is called “Loss Mitigation.” The Court will supervise the modification process. Unreasonable delays by the lender in either granting or denying your loan modification will not be tolerated by the court. Even though a lender cannot be forced to grant a loan modification, the court will force them to justify their reasons for a denial or for any delay. 

Legal Editors: Thomas M. Denaro and Stephen Z. Starr, March 2015

Changes may occur in this area of law. The information provided is brought to you as a public service with the help and assistance of volunteer legal editors, and is intended to help you better understand the law in general. It is not intended to be legal advice regarding your particular problem or to substitute for the advice of a lawyer.

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