For most individual debtors, a Chapter 13 bankruptcy is the primary alternative to filing a Chapter 7. There are many cases in which a Chapter 13 case is preferable to a Chapter 7. Chapter 13 can help individuals prevent foreclosure of their home or retain cars and other property even when they have past due amounts that they cannot realistically repay in the near term. In Chapter 7 cases, lenders often will not afford debtors a significant period of time to cure pre-petition arrearages. In contrast, a Chapter 13 will allow debtors to stretch these amounts over a five year period provided the debtor can also make the regular monthly payments owed on the property.
Chapter 13 Plan
The most vital aspect of a Chapter 13 case is to obtain confirmation of a plan to repay your creditors all or some portion of the debt you owe. You must come up with a plan that is feasible, meaning that you are be able to make the payments proposed in the plan. You also want a plan that gives creditors adequate treatment so it will be approved by the court and you can retain property you otherwise could not keep in a Chapter 7 bankruptcy. This requires meticulous preparation of a budget that is feasible and will comply with the provisions of the Bankruptcy Code. You also want to construct a plan that pays creditor claims only where it will benefit you, such as tax claims which are not dischargeable in bankruptcy and secured claims which will allow you to keep property.
The Plan lasts for a period of three (3) to five (5) years and sets out in detail how all property of the debtor will be treated and how much creditor’s claims will be paid. Plan payments must commence within 30 to 45 days after the case has started. If a feasible plan is confirmed, the individual gets to keep his property and the creditors are paid a fair percentage of the debt that is owed to them.
Modification of Liens
A major difference between Chapter 7 and Chapter 13 is the treatment of secured creditors, those whose claim is secured by property of the debtor. The most prominent examples of secured creditors are creditors with a mortgage on real estate and lienholders listed on the title of your vehicle. In general, secured creditors are given superior treatment to unsecured creditors in bankruptcy because a debtor must pay secured creditors’ claims in full in order to retain property.
However, this is not always the case. In a Chapter 13, a creditor only gets the benefit of being “secured” to the extent of the value of its collateral. When the debt that is owed on a property exceeds the value of the property itself, the filing of a Chapter 13 will allow a debtor to divide the claim into “secured” and “unsecured” portions. The secured portion must be paid in full by the debtor but the unsecured portion is treated like all other claims.
The result of this is that Chapter 13 debtors can reduce monthly payments that they owe on property. This gives Chapter 13 debtors the best chance of retaining property that is no longer affordable.
As with all bankruptcy chapters, an automatic stay goes into effect when you file a Chapter 13 case. The stay stops all creditor actions against you to collect debt and will give you some time to reorganize your finances. One of the mechanisms that you can take advantage of to retain a house that is underwater and too costly is to apply for a loan modification. Banks are normally slow when processing loan modifications as they have a high volume of homeowners applying for them and many times lenders do not want to approve lower monthly payments.
A Chapter 13 filing can provide additional time for the bank to process a pending loan modification and give you leverage in negotiations. You can negotiate with creditors without having the stress of imminent foreclosure and with the provisions of the Bankruptcy Code to support you. A Chapter 13 bankruptcy filing can also allow you to apply for a loan modification if you have not already done so.
Divorce / Property Settlement Agreement Debts
You will also want to consider the beneficial treatment in a Chapter 13 case of debts that result from a property settlement agreement with a former spouse. In a Chapter 7 case, these debts are non-dischargeable which means that you remain liable to pay them even after the bankruptcy case is concluded and the ex-spouse who is owed the debt can resume collection action against you. In a Chapter 13 case, these debts are potentially dischargeable if they are not considered to be in the “nature” of support.
You will need a bankruptcy attorney to review your Property Settlement Agreement to determine which debts are dischargeable and which are not so that you can find out if the Chapter 13 discharge will provide you with any additional benefit over Chapter 7.
Should I File Chapter 7 or Chapter 13?
This is a very important question and you should consult with an attorney before you answer it. To determine whether Chapter 7 or Chapter 13 is right for you, we must review all of your finances and property as well as your goals in the bankruptcy process. The first question that needs to be asked is whether you qualify for either chapter. You may not be able to qualify for a Chapter 7 if you have too much monthly disposable income as you will not pass the means test. For a Chapter 13, the opposite could be true if you do not have enough income to fund a Chapter 13 Plan.
The advantages of Chapter 13 over Chapter 7 include the ability to stop foreclosures and cure amounts owed in order to remain in your house, receive a discharge of debts that are not dischargeable in Chapter 7 and decrease or completely remove a lienholder’s secured claim in real or personal property. If either of these options is feasible for you, it may be worth it to pay some monthly amount to your creditors in a Chapter 13 Plan to obtain these benefits. The advantage of Chapter 7 is that you do not have to make any payments to creditors and can complete the process of obtaining a fresh start in short order.