Chapter 13 Bankruptcy is a payment arrangement that allows you to pay back debts, including missed mortgage or auto loan payments, over time. If you are behind on a mortgage loan or car loan, Chapter 13 can often save your home or car. Although Chapter 13 is designed for individuals, it can also help owners of small businesses weather tough economic times by stretching out payments to creditors. Chapter 13 is often a good solution for people who do not qualify for Chapter 7 because their income is too high. However, it is not limited to high-income earners.
How Chapter 13 Works
The initial process is similar to Chapter 7 in that you must submit to the court a petition, schedules, and other documents detailing your financial situation. However, under Chapter 13 you also submit a plan showing how you plan to pay back your debts, how long it will take, and how much each creditor will get. The typical Chapter 13 plan is 36 to 60 months. (If your income is below the state median, you may submit a 36-month rather than a 60-month plan. Your payment is determined by your disposable income, which is the income you have left over after paying allowable expenses (e.g., housing, utilities, etc.).
Qualifying for Chapter 13
To qualify for Chapter 13, you must show that you have sufficient regular income to pay back at least a portion of your debt. However, because you are not necessarily required to pay back your unsecured creditors at 100%, you may not need as much income as you believe to use Chapter 13 to save your home, vehicle, or other property.
Benefits of Chapter 13
There are many advantages to Chapter 13 that are not available under Chapter 7. Chapter 13 may enable you to do the following:
Save your home or car. The primary advantage of Chapter 13 is that it may allow you to save your home or car. If you are behind on your house or auto loan payments, Chapter 13 will let you catch on the missed payments up over time.
Pay back only a portion of your unsecured debt. Although most secured debt (e.g., mortgage and auto loans) must be paid back at 100%, many unsecured creditors (e.g., credit cards, signature loans, etc.) are entitled to a much smaller amount or even nothing. How much you pay back depends upon your disposable income, the length of the Chapter 13 plan, and the value of any property that would not be exempt under Chapter 7.
Quick Note: With few exceptions, interest and penalties on unsecured debts are suspended during Chapter 13. If you complete your Chapter 13 plan and receive your discharge, all interest and penalties that would have accumulated since filing is discharged.
Reduce interest and balance on auto loans and other secured debts. Chapter 13 allow you to and reduce the interest rate on secured loans (other than mortgage loans) to a point or two above the prime rate. Moreover, you can “cram down” car loans and other debts secured by personal property to the market value of the property. (The remaining debt is paid as unsecured.
Strip off Second Mortgage Liens. If your second mortgage (or third mortgage, line of credit, etc.) is entirely underwater (i.e., not secured by any equity), Chapter 13 allows you to strip off the second mortgage lien and pay the debt like any other unsecured debt. Because unsecured debts may be paid at far less than 100% in Chapter 13, this ability to strip off liens can save thousands of dollars.
Reduce payments on nondischargeable debt. Some debts are not dischargeable, meaning that they cannot be eliminated in Chapter 7 or at the end of a Chapter 13 plan. Such debts include student loans (usually), certain taxes, etc. However, Chapter 13 does give you a chance to stretch those debts out over time, thus reducing your payment while you are in Bankruptcy.
Quick Note: For back taxes, you may be able to eliminate or reduce some penalties in Chapter 13.
No need to deal with creditors. Your Chapter 13 payments are made directly to the bankruptcy trustee, who then pays your creditors. Therefore, you do not need to deal directly with creditors.
Protect Co-Signers From Collections. Unlike Chapter 7, if you have co-debtors who are not filing for bankruptcy (e.g., a relative or friend who has cosigned a loan for you), Chapter 13 may prevent the creditor from going after the co-signer.
For additional information on Chapter 13 bankruptcy, visit our FAQ. If you would like to talk to an experienced bankruptcy attorney about your financial concerns, call Philadelphia bankruptcy attorney Dan Mueller at (215) 248-0989 or use our contact form.