Now Let's Learn About Chapter 13
Most of the Bankruptcy laws are set forth in Title 11 of the United States Code. Title 11 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 two chapters available to most people in need of help are Chapter 7 and Chapter 13. Let's talk about Chapter 13.
IMPORTANT NOTE: Hopefully, you have already read about Chapter 7. Let’s talk about Chapter 13. The best way to do it is by comparison to Chapter 7. If you have NOT yet read the section entitled Learn Chapter 7 your best bet is to stop here and go back and read that section. Once you’ve read that section then come back here. Here are the topics we will discuss.
Filing bankruptcy under Chapter 13 can help you:
- 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.
- Important Disclaimer.
We will also try to answer these two important questions:
- What does it cost to file under Chapter 13?
- How fast can I get relief?
(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 such as 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, this varies a fair amount from State to State, and may or may not require you to pay a portion of this debt. It depends. 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. Turns out the new "Means Test" isn't all that mean, and that's good news for good, hard working Americans all over the place. Disclaimer: Results will vary depending on assets, debts, income and expenses, and not all clients will qualify to pay zero on their unsecured debts.
Yes, it gets rid of debt, but it can get rid of all that accumulating interest, too. Ah yes, don't forget the interest. Generally just like Chapter 7, in Chapter 13, when you get rid of debt you also get rid of the obligation to pay interest on that debt. This is a huge plus. You know from your own experience how much of your payments go to just paying interest and more interest. Not only do you get rid of the debt, you also get rid of all that interest. Where else except under the bankruptcy laws can you do that? The answer is...."No where else".
(2) Doing things that cannot be accomplished by filing under Chapter 7:
This section would be better named: "Reasons to file Chapter 13 instead of Chapter 7."
Why you might ask 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 NINE good answers:
1. Chapter 13 may require less money "up-front": Chapter 13 does some things you can't do in Chapter 7. As you may know from reading about Chapter 7, all the attorney fees for the filing have to be paid "up front," but not in Chapter 13. In Chapter 13, you are required to make monthly payments to a Chapter 13 Trustee a bookkeeper, so to speak, for the Court who handles your case, takes your payments in accordance with certain rules, and distributes money to your creditors. In Chapter 13, you 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.
2.You can get rid of a broader range of debts in Chapter 13 than Chapter 7: 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, many debts are dischargeable, other than alimony and child support, which you are obligated to pay because of a Separation Agreement or Court Order. Section 11 U.S.C. 523(a)(15) does not apply in Chapter 13.
3.You can use Chapter 13 to "catch-up" on a car, truck or house loan: You can't 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. For example, in the Central District of California this type of arrearage is generally set up to be paid back over the entire duration of the Chapter 13 plan. A chapter 13 plan generally ranges from three to 5 years in duration and as you can see this gives you plenty of time to bring these debts current. 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.
4.You can file bankruptcy and still keep property, even if you don't have enough "exemptions" to cover it: Remember our discussion of "exemptions" back in Chapter 7. The same exemptions apply in Chapter 13. The problem comes when you have more property than you can protect with available exemptions. So what do you do? Chapter 13 may be the answer. 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 in the trade, 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.
5.Chapter 13 stops foreclosures and repossessions: As I 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 creditors were allowed to continue with efforts to foreclose on your house or repossess your 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.
6.Sometimes, you just have too much income to file Chapter 7: First, you might ask why in the world would someone with lots of income file bankruptcy. The answer is that sometimes people mismanage the income they have. Sometimes emergencies suck away too much income. Sometimes the extra income is only newly acquired perhaps; you were out of work for an extended period. The people who are able to hold off the creditors long enough to earn enough income to satisfy all the creditors usually don't file bankruptcy. For the rest, filing bankruptcy may be the only solution. The problem is that you are not eligible to file bankruptcy under Chapter 7 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. Experienced bankruptcy attorneys know what will and will NOT fly with their local Bankruptcy Court Judge.
Generally, "too much income" means that you have more monthly "after-tax" income than you have "reasonable or necessary" monthly expenses. The Judges will determine what your "reasonable or necessary" monthly expenses are. Assuming this is the case in accordance with the U.S. Bankruptcy Code, section 11 U.S.C. 707(b) you are not allowed to file a Chapter 7 case because it would be considered a "substantial abuse" of the Bankruptcy Code.
So what do you do? You have 2 choices: Either you do NOT file bankruptcy or you file under Chapter 13. Under Chapter 13, the extra income (in the trade...this is called "disposable income") is factored into your Chapter 13 plan...at least for the first 3 years of your Chapter 13 plan. If you need to file bankruptcy and have, extra income Chapter 13 gives you a way to do so.
7.You can "strip off" a totally unsecured mortgage: You can't 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 say 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 as important, it takes away the need to make monthly payments on this mortgage.
8.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 boatload 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.
New Law change: 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.
Can I "cram down" on my house mortgage?In most cases, the answer is "No". Bankruptcy law is good but, not that good.
9.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, once again, not with respect to the mortgage on your residence). Many people have car or furniture loans where they agreed to pay interest at rates as high as 15 to 30 percent, and sometimes even more. In a Chapter 13 bankruptcy using California as an example, you only have to pay interest at the prime rate, plus 1 to 5 percent. As of 05/10/06, the interest rate is about 8.00%. 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. Going from 15 to 30 percent "outside" bankruptcy to about 8.00% "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.
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 or secured loans.
It is important to get rid of certain types of unsecured debts, mainly because it helps achieve a more important goal of eliminating stress and worry. The stress and worry that comes with having to deal day in, day out with crippling amounts of debt.
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. The believe that they will be in debt for the rest of their lives and there is no hope. They feel that with so much debt, their families will have to go without and that with so much debt they will never get ahead. They feel that they will never be able to buy anything again. In most cases, very simply, these things are just not true.
What a relief people feel when they come into our offices and find out how bankruptcy really works. I cannot describe what a happy surprise this is for many people. For many, it seems like a dream come true and it is. It’s the way Congress created the bankruptcy laws.
I have found that people don’t file bankruptcy to get rid of debt. They file bankruptcy to get rid of the stress of dealing with debt and that hopeless feeling of dealing with something that has got out of control. Something that has taken over their lives and all of their waking moments and that is putting their future on hold.
The look on the faces of many people is almost comical; when we tell them how much debt and how much stress, they can get rid of by filing bankruptcy. They don’t know how to react. They are so used to feeling stressed out, worrying, and feeling helpless. They don’t know how to feel when they find out for the first time how much debt bankruptcy can really eliminate. When we tell them how much debt bankruptcy can eliminate and how easy it is to file you can see the heavy anvil being lifted from their chests. It doesn’t seem normal to them. We have to keep telling them, “It’s true. Believe it or not. It’s true. Bankruptcy really does this.” 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. Sometimes, we even have to tell them to sit back and take some deep breaths to let the information sink in.
Giving people who have been struggling with overwhelming debt for months or years news that brings this kind of relief is what it’s all about for lawyers like us. This is why practicing bankruptcy law is both a privilege and a pleasure.
This benefit of filing bankruptcy is much the same in Chapter 13 as it is in Chapter 7.
(4) Keep and protect property you want to keep. For whatever reason, people think that if they file bankruptcy, they will lose everything they have. Nothing could be further from the truth. Most of our clients keep everything they own and lose nothing. Why? Because there are these things called "exemptions". We talked about them in the section entitled: Learn About Chapter 7. The same exemptions apply to help protect property in cases filed under Chapter 13. In the occasional case where it looks like a client has too much "stuff" to cover with exemptions, that is where 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 as mentioned above.
Using California as an example there are exemptions to cover lots of things including houses, mobile homes, land, cars, trucks, household goods, furniture, wages, life insurance cash value, personal injury and worker's compensation claims, tools of trade, retirement plans, IRA's, and the list goes on.
Just like with Chapter 7 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 on the other hand, 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 and it has a name. It’s name is called "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 .and it works like this. 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 .but to use the Central District of California as an example, it works like this: Say you have a car (one that was bought more than 2 1/2 years ago) that according to the NADA "blue" book has a "retail" NADA value of $10,000 .but that .for whatever reason .you owe $15,000 on it. Chapter 13 allows you to "cram down" the creditor which means you can set up your Chapter 13 plan to pay the creditor $10,000 (the value of the car) rather than $15,000 (the amount owed). This can translate into huge savings for you in addition to the other benefits of filing bankruptcy and can make all the difference between your 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. Just like in Chapter 7, Chapter 13 can help a client get out from under certain property and the debt associated with it. For instance, 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. Say you have had to move elsewhere. Unless you can figure out a way to get rid of the mobile home and the debt owed on it, you are stuck. Just like with Chapter 7, Chapter 13 can provide a solution.
What happens is this. 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 sell it, they would come back to 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. Not in Chapter 13 bankruptcy, under the law after you surrender property back to a lender all that's left is an "unsecured" claim against you and as you now know all that generally has to be paid on unsecured claims is pennies-on-the-dollar, and NO interest. Problem solved. Thank you Chapter 13!
The same result can 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. Just like with Chapter 7 one of the most powerful things about Chapter 13 is the "automatic stay". To recap what you read in "Learn About Chapter 7" the words "automatic stay" don't sound very powerful but believe me this thing called the automatic stay is very powerful. Here is what happens. 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 comply quickly with the order. Included in the duties imposed on the creditor is the duty to stop all collection calls at home and work, to stop writing collection letters, to stop all lawsuits, and to take whatever steps are necessary to "call off the dogs", as in the case of "repo" men and foreclosing attorneys. The creditor also has 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. Why? With respect to all the debts that get "discharged" (which means "eliminated"), it 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 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 pick up where they left off. The good news is that hopefully, if you got rid of enough of the other debt in your bankruptcy case you will now have more income and be in a better position to deal with these residual “non-dischargeable” debts.
(7) Free up income for your family. The whole idea of getting rid of some debts and paying less on others is so that you don't have to pay out as much of your income on those debts. This relieves stress and lots of it but to recap what we said about Chapter 7 it also does something else. 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 your income to take care of other more important things like your normal monthly living expenses. This means that hopefully as long as you hold onto your job you are in a better position to take care of your family. Being in a better position to take care of your family means that you can get your life started again.
Not filing bankruptcy can mean you are "stuck in neutral" or worse, "stuck in reverse". Filing bankruptcy be it Chapter 7 or Chapter 13 and getting rid of some of the burden of debt generally means you and your family can start moving forward again. No stress and a chance to move forward. You have a second chance at a fresh start and 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 "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. But 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. The idea is this. The first step is filing bankruptcy and getting rid of enough debt so that you can live on what you earn. 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 make a difference then, and thereafter if you are careful 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 re-building 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, as long as you make your Chapter 13 payments 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. Three important steps need to be taken in order to re-build your credit.
Without doubt, if you are to the point where you need to file bankruptcy, your credit is beyond repair already. Bluntly put, your credit is dead. If so, 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. Think about it. 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 that you hold your life together, keep your job, don’t get divorced, emergencies are limited, you get the raises, promotions you deserve a job where you bring less and less stress to work each day because debts are no longer stressing you out) then for the first time in a long time you can start saving some money. Saving money can help provide you with the necessary down payment for buying new things and on and on you go rebuilding credit.
In addition, by getting rid of some debt your debt to income ratio starts looking better. Over time, you have money in the bank from saving money on income no longer ravaged by bills. Naturally and gradually, you will start to attract the attention of more and more willing lenders. 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. Consequently, 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. I mention this because although all of the information mentioned before 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 himself. 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. You can receive a consultation for free most of the time, except perhaps, for people who own and run large or fairly large businesses. Our office offers a totally FREE initial consultation. So, you can learn about all your rights and all your options bankruptcy and otherwise. You can get fast answers to all your questions about debt and how to deal with it.
(11) What does it cost to file under Chapter 13? We can't speak for all attorneys...but generally, subject to certain exceptions....in our office...for purposes of filing cases in the Louisiana District
....the "up-front" retainer for filing Chapter 13 is $200. The overall cost of representation in a Chapter 13 case varies from State to State. In Louisiana, the cost for the garden-variety Chapter 13 case is set can vary from $3,000 to $4,500 or more depending upon what services are required.
(12) How fast can I get relief? The answer is the same as for Chapter 7. We can’t speak for other attorneys but our answer is this. In most cases, we work as fast as you pay us and provide us with the documents and other information necessary to prepare the schedules required in filing your case. Your case can be filed in as little as a week and even quicker in an emergency. In an emergency if need be to avoid repossession or to stop a foreclosure we can free up staff to get a case filed in less than a day.