Does Filing Chapter 13 Bankruptcy Make Sense?
This question is trying to resolve a seemingly obvious contradiction - Why file bankruptcy and if I'm going to keep repaying my debts?
That doesn't make sense does it?
I would agree that it doesn't make sense if that's really how Chapter 13 bankruptcy worked. But that's not how things typically work in a Chapter 13 bankruptcy.
The legal process for Chapter 13 bankruptcy is established in the bankruptcy code, implemented by the bankruptcy trustee, and overseen by a bankruptcy court. This legal framework ensures that the repayment plan you and your bankruptcy lawyer create is fair and reasonable, taking into account your financial situation to establish affordable monthly payments based on your disposable income.
That's the key to Chapter 13 bankruptcy - The repayment plan is based on what you can afford. So if you can no longer afford your monthly debt payments and it would take a decade or more to repay your debt, then Chapter 13 bankruptcy gives you a chance to get out of debt faster, cheaper, and with payments that you can afford. That makes a lot of sense.
Who Should Consider Filing Chapter 13 Bankruptcy?
A lot of folks think about Chapter 7 when they think about bankruptcy. That is, they imagine a process where they may lose certain nonexempt property and all of their unsecured debt will be discharged in a few months without any repayment whatsoever. But many folks who are overwhelmed by debt and in need of real debt relief don't qualify for Chapter 7. Here's a quick breakdown of the top four situations where Chapter 13 bankruptcy makes sense.
Can't Afford Minimum Payments
If this seems obvious then you may be surprised to learn that many folks who file for bankruptcy are managing to make their minimum payments each month. However, folks who can no longer afford their minimum payments are in an especially difficult situation because their credit is taking a hit every month when they miss more payments, they're getting harassed by creditors, and soon enough they may end up getting sued and dealing with garnishment. This is a rough situation for folks to find themselves in.
Chapter 13 bankruptcy is a particularly good option for helping these folks, because their repayment plan is sure to be an amount they can afford. That means they don't have to worry about how they're going to afford anything, and they don't have to deal with collections, calls from creditors, and the threat of lawsuits.
Debt Repayment Will Take Decades
Folks in this situation are usually managing to make their minimum payments each month, but doing so causes them to be broke. Even if they have fair to high income, they're still living paycheck to paycheck and they'll continue doing so as long as they have to continue repaying their debt. But the kicker is that it's going to take them literally decades to repay their debt at the rate they can afford. That means that after they finally pay off all of their debt, after living paycheck to paycheck for decades, they'll have nothing to show for all of their had work over the years and they'll have minimal retirement savings to rely on as they age.
Chapter 13 gives these folks a date in the near- to mid-future when they'll be out of debt. That means they'll be allowed to begin saving for their future and enjoying the life that they've worked so hard for. This provides peace of mind and helps to avoid the long-term financial burden of carrying debt for an extended period. By taking action now and filing for Chapter 13 bankruptcy, you can take control of your financial future and work towards achieving debt relief.
Stop Foreclosure
Chapter 13 bankruptcy is a powerful resource for folks facing foreclosure. The automatic stay goes into effect as soon as you file Chapter 13 bankruptcy, halting all foreclosure actions against your property even up to the morning of the foreclosure sale.
After you file Chapter 13 you'll have the opportunity to catch up on missed mortgage payments and avoid losing your home. Your mortgage arrears (the amount you're behind on your mortgage) will be included in your Chapter 13 repayment plan lasting three to five years. This can provide much-needed relief and allow you to keep your home.
Repossession
Chapter 13 bankruptcy can stop a repossession before it happens and it can help you regain possession of your vehicle after it's been repossessed. If you're car was already repossessed you'll need to move quickly though, with the general expectation to being to file your bankruptcy petition within ten days after the repossession. You'll have the opportunity to catch up on your vehicle payments as part of your three to five year Chapter 13 repayment plan.
The Chapter 13 Repayment Plan Explained
The core feature of Chapter 13 bankruptcy is the repayment plan. Because of this, the only requirement to qualify for this type of bankruptcy is that you must have regular income.
The Chapter 13 repayment plan can be intimidating if you don't understand how it operates. The plan will consist of structured, affordable payments based on your disposable income and taking into account your monthly expenses and obligations. The payment plans typically last three or five years depending on your income. Every plan must be approved by the bankruptcy court and they're overseen by the bankruptcy trustee.
Calculating Your Disposable Income
Calculating your disposable income is a crucial step in creating a Chapter 13 bankruptcy repayment plan. Disposable income is the amount of money left over after deducting your reasonable and necessary living expenses from your monthly income.
Obviously, before we can determine your disposable income we must calculate your monthly income. To calculate your monthly income we add up all of the income you've received over the last six months and divide by six (certain income such as social security VA disability pay is exempt from being considered income). After we know what your monthly income is we take a look at your monthly expenses, everything from housing costs to groceries to out-of-pocket medical costs. Once we determine your total monthly expenses, we find subtract that figure from your monthly income and the amount that's left over is your disposable income. The expectation while you're in a Chapter 13 repayment plan is that you will pay all of your disposable income into the plan every month.
It's important to note that calculating your monthly expenses is an important step, as the bankruptcy trustee is going to review your expenses thoroughly and will have a very good idea about how much a family of a certain size should be spending on certain things. If you have special circumstances requiring unusual spending for certain things, that's usually not an issue as long as you can document the need for the expense and your history of paying for the expense. It's important to have a trusted bankruptcy attorney help you prepare and review your disposable income and expenses before you file Chapter 13 bankruptcy in Texas.
How Long is a Chapter 13 Repayment Plan?
Chapter 13 repayment plans are usually three or five years long, with the default plan being five years. If you're filing Chapter 13 bankruptcy because you don't qualify for Chapter 7 your repayment plan will be five years. To qualify for a three year payment plan you must be able to qualify for a Chapter 7 bankruptcy due to your income being at or below the median income in your state or you must pass the means test. This means that the majority of folks with three year repayment plans are filing Chapter 13 due to repossession or foreclosure.
What Happens to Secured Debt in a Chapter 13?
Your secured debts may be included in your repayment plan if you're behind on your payments or if there are options for restructuring the debt(s) that save you money or allow you to pay off the debt earlier. Including secured debts in your repayment plan allows you to make regular payments on as well as additional payments to catch up on arrears (the amount you're behind) and keep your property. For example, if you are behind on your car payments, you can include the past due amount in your plan and make regular payments to bring your car loan current. The same applies to a mortgage payment. By including your mortgage arrears in your plan, you can make regular payments to catch up and avoid foreclosure.
What Happens to Unsecured Debt in a Chapter 13?
Unsecured debts, such as medical bills, personal loans, and credit card debt, receive some repayment in Chapter 13 but may not be paid in full. Any unsecured debt that's not repaid through the plan gets discharged when the bankruptcy is over. Generally, unsecured creditors are entitled to receive an amount equal to the sum of your disposable income over the life of your repayment plan. Otherwise, there is no minimum amount that unsecured creditors are entitled to receive in Chapter 13 bankruptcy.
After you file your bankruptcy petition for Chapter 13, all of your creditors will have time to file a "proof of claim." Creditors may file priority claims, secured claims, or unsecured claims depending on the types of debt. After the deadline expires for proofs of claim to be filed, the trustee determines how much each creditor will receive through the plan based on the amount of your plan payment and the proofs of claim.
Priority unsecured debts, such as tax debts, child support arrears, and certain criminal fines to name a few must be paid in full over the course of your Chapter 13 bankruptcy. These debts take priority over other unsecured debts (called "general unsecured debts"), meaning they'll be paid in full before the general unsecured debts are paid.
Generally, unsecured creditors (including priority unsecured creditors) are guaranteed to get an amount equal to your disposable income over the course of your Chapter 13 repayment plan. However, there are certain situations that may require you to pay more to your unsecured creditors.
For example, you're allowed to keep certain property in a Chapter 13 that you can't protect with bankruptcy exemptions, but the trade off for keeping it is that you have to make sure that your unsecured creditors are paid an amount equal to the value of the property you're keeping. The idea behind this is simple, since you can't protect the property it could be liquidated, meaning it could be sold and the proceeds distributed to your creditors. So if you want to keep it you have to give your creditors an amount equal to what they would receive if the property were liquidated.
Advantages of Filing Chapter 13 Bankruptcy
Of the different types of bankruptcy, it's understandable that a lot of folks are originally drawn to Chapter 7 instead of Chapter 13. However, there are real benefits to filing Chapter 13 and many folks ultimately realize this and find relief in the certainty and protections afforded by Chapter 13 as well as the eventual discharge of debt they receive at the end.
Pay Less to Get Out of Debt
Ultimately, Chapter 13 allows many folks to get out of debt after repaying much less than what they what they owe. This is true for folks who can't afford their minimum payments as well as folks who are managing to make their minimum payments but will have to pay on their debt for decades before getting out of debt. Chapter 13 caps your payments at an amount you can afford and requires you to make sixty payments. Any remaining debt is discharged after that. That's a quite a benefit no matter how you look at it.
Get Out of Debt Faster
Many folks who end up filing Chapter 13 bankruptcy would otherwise have to pay on their debt for decades before they paid it off. Chapter 13 gives them an option to pay what they can afford for five years, and at the end of those five years any remaining unsecured debt is discharged. If you're in a situation where it will take more than five years to repay your debt, Chapter 13 bankruptcy could be really useful for helping you get out of debt.
Keep Your Property
One of the advantages of filing for Chapter 13 bankruptcy is the ability to keep property you can't protect using exemptions. Unlike Chapter 7 bankruptcy, which may require the liquidation of assets, Chapter 13 bankruptcy allows you to keep all nonexempt property that you can afford. To determine if you can afford the property, you have to assess the current value of the property. Afterward, you have to decide whether you can pay that amount into the plan over the life of the plan (either thirty-six or sixty months). As long as you can afford to make those payments then you can keep the property.
If you're wondering why you have to give your creditors an amount equal to the value of the property, it's because the property is nonexempt and could be liquidated. If that were to happen then the plan would be funded with an amount of money equal to the value of the property. So in order to keep the property, you must in turn fund the plan with an amount of money equal to the value of the property.
How Long Does it Take to File Bankruptcy Chapter 13?
Preparing to file Chapter 13 bankruptcy is a process of collecting all of the necessary paperwork, providing specific information, and completing all of the bankruptcy paperwork. On average, the bankruptcy petition is between 70 to 130 pages and the Chapter 13 plan is between 7 to 15 pages. The amount of time this may take will vary depending on how quickly you're able to gather all of the required documents and provide the specific information, and how long it takes your bankruptcy lawyer to complete the official forms and Chapter 13 plan.
Emergency Bankruptcy Filing
For folks who need to stop a foreclosure sale or get back a vehicle quickly after repossession, they can file an emergency bankruptcy. This is a process provided for under bankruptcy law whereby you can file a "bare-bones petition" consisting of only the first eight pages with the most basic information. This triggers the automatic stay halting a foreclosure sale or prompting a creditor to return your vehicle after repossession. After filing the bare-bones petition, you'll have fourteen days to file the rest of the required bankruptcy paperwork. Failure to file the rest of the required paperwork on time can result in your case getting dismissed without you receiving a bankruptcy discharge.
Chapter 13 Timeline
The official bankruptcy process begins once you file your bankruptcy petition and the automatic stay is put into place. The next step is to provide the bankruptcy trustee with certain required paperwork in advance of your 341 meeting (aka "meeting of creditors"), which usually takes place between four to six weeks after you file your petition. The final step after your 341 meeting is your confirmation hearing. This is when your Chapter 13 repayment plan gets approved or denied by a bankruptcy judge. If the trustee agrees with your plan and if there are no objections, then there may be no need for you to attend your confirmation hearing and your Chapter 13 repayment plan will be confirmed.
One important point not included above, is that you must make your first plan payment no later than 30 days after you file your bankruptcy petition. Failure to make your first plan payment on time may result in your bankruptcy case being dismissed without you receiving a discharge.
Is Chapter 13 Bankruptcy Right for Me?
Chapter 13 bankruptcy is a powerful tool for helping folks get out of debt faster and for less money than simply making their minimum payments over a prolonged period of time. Chapter 13 makes sense for folks who can no longer afford their minimum payments, as well as folks who are living paycheck to paycheck to pay their minimum payments and will continue living that way for decades before their debt is finally paid in full. It's also a life raft for folks facing foreclosure and repossession, as the automatic stay stops all creditor actions and the Chapter 13 plan gives you the opportunity to catch up on your arrears over the course of your three to five year repayment plan. If you're overwhelmed with debt and searching for a fresh start, contact us today to schedule your free consultation.