The Basics of Chapter 13 Bankruptcy
Chapter 13 bankruptcy is one of the different types of personal bankruptcy available to help individuals facing certain financial situations.
What is Chapter 13 Bankruptcy
Sometimes called a wage earner's bankruptcy, Chapter 13 bankruptcy allows folks with regular income to create a repayment plan to repay all or part of their debt. Unlike a Chapter 7 bankruptcy, which involves liquidating nonexempt assets, Chapter 13 bankruptcy is a process of debt reorganization.
How Long is a Chapter 13 Repayment Plan
The amount of time you're required to be in a Chapter 13 repayment plan is typically three or five years, depending on whether you pass the means test. Folks who don't pass the means test (meaning they don't qualify to file a Chapter 7) have to complete a five year
repayment plan, while folks have the option to complete a three year repayment plan if they choose to file a Chapter 13 even though the pass the means test and could file a Chapter 7 bankruptcy.
Why Choose a Longer Chapter 13 Repayment Plan?
Often times when folks qualify to file a Chapter 7 but choose to file a Chapter 13 it's because they want to save secured property they've fallen behind on, like their mortgage or car loan. Filing a Chapter 13 allows them to catch up on these loans over the course of their repayment plan, and sometimes three years may not be enough time to for them to catch up and keep their monthly payments affordable. In this situation, choosing a longer repayment plan may allow them to make lower monthly payments as part of their repayment plan, while giving them more time to catch up on the loans they're behind on so they can keep their secured property.
Do I Have to Repay All of My Debt in Chapter 13 Bankruptcy?
No. The amount of unsecured debt you repay in Chapter 13 bankruptcy varies greatly depending on your specific financial situation. There are plenty of bankruptcy cases out there where unsecured creditors receive zero percent repayment, but there are also plenty of cases where unsecured creditors receive one-hundred percent repayment. Any unsecured debt that hasn't been repaid gets discharged at the end of a successful Chapter 13 repayment plan.
You do have to repay the total amount you're behind for any secured property you want to keep, and you have to pay off all of your secured debt except your mortgage (there are certain perks that often make this easier to do in bankruptcy). Additionally, if you have any tax debts, those have to be fully repaid before you can receive your bankruptcy discharge.
Why File a Chapter 13 Bankruptcy
There are many different reasons leading folks to file Chapter 13 bankruptcy. Some folks file Chapter 13 because repaying their debt has become unmanageable and they don't qualify to file a Chapter 7. Others choose to file Chapter 13 bankruptcy because they're being sued and can't afford to defend the lawsuit or pay the judgment or both. Still many other decide to file Chapter 13 bankruptcy to avoid foreclosure and repossession. We dive into a bit more detail on each of these reasons below.
Debt Repayment Has Become Unmanageable
Although this is an obvious reason to file bankruptcy, it's often overshadowed by discussions about foreclosure and repossession when we talk about Chapter 13. That's because there's not always the same sense of urgency spurring these folks to file right away "or else," but that doesn't mean that the need for these folks to file is any less real.
Many folks in this situation have been struggling managing their debt for a while now. They're making minimum payments on at least some of their debt, but they're just realizing (or just allowing themselves to finally acknowledge) that one of the following is true:
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If they pay for all of their necessary living expenses, then they don't have enough left over to make all of their minimum payments.
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If they make all of their minimum payments, then the only way they can afford all of their necessary living expenses is to use their credit cards (this is called the debt cycle).
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They can afford their necessary living expenses and minimum payments but they have nothing left over, and they know that continuing this way will take them decades to repay their debt and require them being financially strapped the entire time.
These folks may often get discouraged when they begin researching bankruptcy because they usually discover pretty quickly that they won't qualify for a Chapter 7 and they're scared of a Chapter 13 repayment plan. They're worried if they'll have enough money to afford to make the payments and pay to live. Nobody wants to file bankruptcy and remain in the same position or be worse off, so this is a completely understandable concern. But these concerns can be laid to rest easily by understanding how a Chapter 13 monthly payment is calculated (see below).
In a nutshell, it's safe to say that you won't be required to repay more than you can afford. Your Chapter 13 repayment plan will require you to pay for your necessary living expenses, and whatever is leftover will get paid into the plan. In a lot of situations, this means that if there's nothing leftover then there's simply nothing to pay into the plan. There are, however, a lot of factors to consider and decisions to be made that can impact your final plan payment, and consulting with our Austin bankruptcy attorney can help ensure your Chapter 13 repayment plan works for you.
Debt Repayment Would Take Too Long
Chapter 13 allows you to get out of debt in five years. For folks who can afford their living expenses and their minimum payments (and maybe even a bit more), getting out of debt in five years can be a real relief when doing nothing and leaving things the way the are may mean paying on their debt for the next decade or more.
Many folks in this situation are between 30 to 50 and they've worked hard to be where they are, but now they really need to start preparing for the future. If they don't get out of debt they'll never be able to save for their future. Chapter 13 offers a way out of debt that will give them the opportunity to save and prepare for the next phase of their life.
Stop Foreclosure
Chapter 13 bankruptcy is a powerful tool for stopping a foreclosure in its tracks, even as late in the process as the morning of the foreclosure sale. This significant power to stop a foreclosure comes from the automatic stay, which goes into effect as soon as you file your bankruptcy petition.
After you stop the foreclosure by filing Chapter 13 bankruptcy, the next step is to begin making payments into your Chapter 13 repayment plan. Because Chapter 13 is a reorganization of debt, many of the folks filing Chapter 13 due to foreclosure often benefit greatly by being able to reorganize their debt so that they can afford their mortgage and the payments to catch up on the amount their behind. This is possible because of the priority that's assigned to debts in bankruptcy and used by the bankruptcy trustee to distribute money you pay into the repayment plan (see below).
Stop Repossession
You can stop a repossession before it happens and get back your vehicle after it's been repossessed by filing a Chapter 13 bankruptcy.
If your vehicle has already been repossessed, then you'll need to file Chapter 13 bankruptcy within ten days after the vehicle was repossessed to regain possession of your vehicle. The amount you're behind on your vehicle is put into your Chapter 13 repayment plan, and you get to keep your vehicle without the looming fear of repossession. It's important to note that you must remain current on your car payments (which may be included in the plan along with the amount you're behind) throughout the bankruptcy case. Failing to remain current on your car payments may still lead to repossession even if you're in bankruptcy.
Folks who file Chapter 13 bankruptcy to stop repossession often benefit from the reorganization of debt that their able to achieve by filing Chapter 13. Not only does the prioritization of debts (see below) benefit these folks, there are also certain benefits in Chapter 13 bankruptcy that can make repaying auto loans faster and cheaper than repaying them outside of bankruptcy. Working with our Austin bankruptcy lawyer to get can help debtors navigate the process, protect their personal property, and gain a fresh start.
File Bankruptcy Due to Lawsuits
The automatic stay stops most lawsuits in their tracks, at least temporarily. This can be really appealing for folks being sued for a money judgment, because by the single act of filing for bankruptcy they can eliminate the costs for defending the lawsuit, as well as any financial liability that could result from the lawsuit. Not to mention getting rid of the stress and headache that goes along with being involved in a lawsuit.
The thing to lookout for here, though, is the reason why you're being sued. If you're being sued for something that will result in a debt that's not dischargeable in bankruptcy, then the lawsuit may be allowed to resume even while you're in bankruptcy.
There are also many folks who are just served with debt lawsuits and that's what forces their hand in accepting that debt repayment has become unmanageable. These folks will benefit from the automatic stay and the party that's suing them will be treated like the rest of the creditors who are similar to them (secured like secured, unsecured like unsecured, etc.).
You're not required to file a certain type of bankruptcy just because you've been sued. If you've been sued and you qualify to file a Chapter 7, then you can do that, but if you don't pass the means test then you'll need to file a Chapter 13 instead.
Benefits of a Chapter 13 Bankruptcy
There are certain benefits included in the Chapter 13 reorganization process that makes repaying debt easier than trying to do so outside of bankruptcy.
Zero Interest on Unsecured Debt
Many folks who file Chapter 13 will end up repaying at least some unsecured debt, such as credit card debt, personal loans, and medical bills. But the Chapter 13 repayment plan consolidates your unsecured debt into a structured amount that doesn't accrue any interest, and any payments you make on your unsecured debt are interest free.
This can significantly reduce the financial burden associated with high-interest credit card debt and medical bills, allowing your payments to actually reduce the amount owed rather than just going toward interest. This is just one of the ways Chapter 13 puts you on a path toward financial recovery and debt relief, allowing you to regain control your finances and achieve a fresh start.
Get Rid of Negative Equity in Your Vehicle
By filing for Chapter 13 bankruptcy, some individuals can effectively eliminate the negative equity in their vehicles and restructure their car loan payments to reduce the outstanding balance.
This process involves breaking the current loan balance into two new debts. The first debt is a secured debt and it's equal to the current replacement value of the vehicle. The second debt is the remaining balance on the current loan, and it's an unsecured debt.
For example, if you have a car worth $10,000 but your current loan balance is $18,000, we would reduce the secured portion of your loan to $10,000 and create a new unsecured debt of $8,000.
It's important to note that this benefit is only available if you purchased your vehicle 910 days before filing bankruptcy, which is roughly two and a half years.
Get Out of Debt
Chapter 13 provides real debt relief. First, many folks may find that they spend less each month to repay their debt. Next, at the end of the repayment plan the debtor receives a discharge that eliminates most, if not all of the unsecured debt that doesn't get paid during the repayment plan. However, it's important to note that certain debts like child support, alimony payments, and student loans still aren't dischargeable in Chapter 13.
How Do I Calculate my Chapter 13 Monthly Payment?
There are several steps you must take to know for sure that you've finally arrived at your monthly payment amount. First, you determine your disposable income, then you determine how much it costs to pay the the top 3 priority categories for Chapter 13, then you determine the value of your nonexempt assets. After you have each of those calculations, you have to make sure that your proposed payment amount satisfies each of the calculations.
For example, if your disposable income is $1,200 and it would cost you $900 per month to pay priority categories 1-3 of your debt, then it would seem as though all you need to do is pay $1,200 per month into your plan. However, you need to remember to check the value of your nonexempt assets to make sure repaying your unsecured creditors $300 per month (remember that priority categories 1-3 are getting $900 per month, meaning there's $300 left over each month for unsecured creditors) will cover the value of your nonexempt assets. Let's say you have a second truck valued at $25,000 that we can't exempt (only 1 per licensed driver in your home). You'll need to increase your plan payment in this situation, because making $300 payments for 60 months will only pay your unsecured creditors $18,000, so you'll need to increase your payments by $129 per month in order to make up the difference (this calculation includes the additional $7,000 and the 10 percent you'll have to pay to the trustee for administering the payments.
How Do You Calculate Your Disposable Income for Chapter 13?
To begin the first step, you need to add up all of the income that you received for the previous six months and average it out to determine your total monthly income. Next, you deduct your reasonable allowable expenses. This includes everything that you have to pay unless you're going to include that item in your Chapter 13 repayment plan. For example, if you're behind on your mortgage you'll need to make your mortgage payments through your repayment plan so you wouldn't deduct those expenses here (you'll deduct them in the next step).
You want to make sure you're including expenses that don't fit neatly into a monthly budget like oil changes, new tires, and renewing your registration. You'll want to figure out the monthly cost for these expenses by dividing the total price by how frequently you have to purchase the service. Here's a few examples:
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If you get oil changes every 3 months and they cost $50, then you would divide $50 by 3 months to know that you pay $16.67 per month for an oil change.
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If you get new tires every 2 years and they cost $800, then you'll divide $800 by 24 months (always use months) to learn that you pay $33.34 per month for new tires.
Remember to also include things like your average monthly spend on copays, over the counter medicine, insurance, and entertainment. Sometimes you may have a reason why some of these expenses are high. That's okay as long as you have documentation to prove the reason for your increased expense. If your spending on some of these areas is too high simply because you're overspending, then that will need to be addressed and you'll have to find a way to reduce your spending in that area.
After you've determined your average income and expenses, you deduct your expenses from your income and the amount that's left over (if any) is your "disposable income" that you're required to pay into the plan each month. You should know that there are certain types of income, like social security benefits, VA disability benefits, etc. that aren't considered income in this process. This explanation is simply for educational purposes to help provide a general understanding of how these calculations are made, you should schedule a consultation with our Austin bankruptcy lawyer to discuss the specifics of your situation.
How Debt Repayment is Prioritized in Chapter 13 Bankruptcy
Each month you make payments to the trustee for as long as you're in Chapter 13. The trustee distributes that money to your creditors according to the following prioritization established in the bankruptcy code.
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Administrative Costs - These costs include the trustee's fee (10% in Central Texas) and any other costs that arise after your bankruptcy is filed that relate to the administration of your case.
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Secured Creditors - This includes any mortgage and car(s) that you're repaying through your Chapter 13, as well as any arrearage (amount your behind) on these debts.
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Priority Unsecured Creditors - Some examples include back taxes, your attorney fees, and certain criminal fines.
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Unsecured Creditors - Credit cards, loans, medical bills, deficiency judgments, etc.
You have to fully repay the first three categories (except a mortgage) in order to complete your Chapter 13 bankruptcy and receive a discharge. This means that your Chapter 13 payment needs to be at least enough to pay the first three categories each month, regardless of the disposable income calculation described above (if you're paying your mortgage or car through your Chapter 13, then you don't include those payment in your expenses when determining your disposable income). Your unsecured creditors get whatever is leftover after your monthly payment is applied to the first three categories.
Value of Your Nonexempt Property
The final step is to determine the value of your property that you can't exempt. You'll need to make sure that you're unsecured creditors are paid at least this much over the course of your repayment plan. The reason for this is because your unsecured creditors would receive this amount if you were to file a Chapter 7 bankruptcy instead (because your unexempt property would be sold and the proceeds distributed).
Can You Keep Your Property in Chapter 13 Bankruptcy?
Yes, this is one of the perks of Chapter 13 and sometimes the reason why folks choose Chapter 13 instead of Chapter 7. You can keep any property that you would lose in a Chapter 7 as long as you can afford it.
What if I've Filed Bankruptcy Before
Sometimes things don't always go like we expect, and for some folks that means they may need to file bankruptcy again. Here's a quick overview of how long you may need to wait if you've filed bankruptcy.
Chapter 7
If you're considering filing under Chapter 7 bankruptcy but you've previously filed bankruptcy then you'll need to be familiar with these waiting periods:
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If you've previously filed a Chapter 7 and you received a discharged, then you must wait eight years from when you received your discharge before you can file again.
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If you've previously filed a Chapter 13 and you received a discharge, then you must typically wait six years from when you received your discharge before you can file again.
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If you filed for bankruptcy but didn't receive a discharge, then you can usually file again but not always. Sometimes you may need to wait 180 days before filing, and your automatic stay may be shortened. It's important that you speak with an attorney if you find yourself in this situation.
Chapter 13
If you're considering filing under Chapter 13 bankruptcy but you've previously filed bankruptcy then you'll need to be familiar with these waiting periods:
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If you've previously filed a Chapter 7 and you received a discharged, then you must wait four years from when you received your discharge before you can file again.
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If you've previously filed a Chapter 13 and you received a discharge, then you must typically wait two years from when you received your discharge before you can file again.
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If you filed for bankruptcy but didn't receive a discharge, then you can usually file again but not always. Sometimes you may need to wait 180 days before filing, and your automatic stay may be shortened. It's important that you speak with an attorney if you find yourself in this situation.
The Process of Filing a Chapter 13 Bankruptcy
Filing Chapter 13 is a process that involves accurately documenting your finances, categorizing your debt, proposing a repayment plan, and successfully completing the plan.
Required Documents
The first step in preparing your bankruptcy petition is to make sure that you have all of the required documents. These documents are essential because they contain all of the financial information necessary to complete your petition and schedules. You'll also have to answer questions about your financial history to complete the petition. Although your bankruptcy team is going to put your Chapter 13 together for you, they're simply not going to be able to do it without you taking care of this first step. Examples of the basic documents they'll need include W-2s and tax returns, paystubs, and financing agreements just to name a few.
Credit Counseling
While your team of bankruptcy professionals is preparing your case, you're going to complete a credit counseling class. This class must be completed within the 180 days before your petition is filed, and you're bankruptcy attorney will likely direct you where to go to complete the class.
The Automatic Stay
As soon as your bankruptcy is filed the automatic stay goes into full force. This is a serious relief for folks facing financial distress. It's the mechanism that stops foreclosure proceedings and halts repossession of property. This legal injunction prevents any legal action from creditors, providing relief from creditor harassment.
The Chapter 13 Trustee
The oversight of the repayment plan is a key responsibility of the trustee in charge of your Chapter 13 bankruptcy. They also play a crucial role in disbursing payments to your creditors and ensuring strict adherence to all relevant bankruptcy laws. The Chapter trustee represents the bankruptcy estate and safeguards the rights and interests of all involved parties, making sure that each creditor gets the full amount their due under the plan. They have the power to file motions and make serious recommendations to the bankruptcy court when they believe things aren't going according to plan.
The 341 Meeting
Also known as the meeting of creditors, the 341 meeting is a significant step in the process. It serves to verify the accuracy and truthfulness of the information provided in the bankruptcy petition, and in a Chapter 13 it's also an opportunity for the trustee to ensure review your budget with you and make sure that you have the ability to make your plan payments. Notably, the bankruptcy judge is not present at 341 meetings, but the meetings are "on the record" and you'll be sworn in before being asked to answer any questions.
Confirmation of Your Plan
This is an essential milestone in your Chapter 13 bankruptcy. Your Chapter 13 repayment plan is customized to fit within your regular income and it may reduce the amount you're paying to unsecured creditors. Your plan must follow strict adherence to bankruptcy laws and requires court approval for implementation.
The Chapter 13 Discharge
Your bankruptcy discharge is an official court order releasing you from liability to repay certain debts. Your will receive a discharge upon successfully completing your Chapter 13 repayment plan. Generally, any remaining unsecured debt that's not repaid through your repayment plan will be discharged.
Conclusion
Chapter 13 bankruptcy is a legal process that provides individuals with an opportunity to reorganize their debts and create a manageable repayment plan. The debt relief that folks experience from filing a Chapter 13 can be significant, with many folks getting debt free in significantly less time than they would otherwise. There are many benefits of Chapter 13 that allow folks to get rid of negative equity in the vehicles, catch up on late payments for their mortgage or car, and repay unsecured creditors at zero interest. Chapter 13 is also a powerful tool for stopping foreclosure and repossession in their tracks, even right up to the last minute. If you're tired of struggling to repay debt that's going to take a decade or more to repay, then book online or reach out to us today schedule your free consultation with our Austin bankruptcy lawyer.