How Does Chapter 13 Bankruptcy Work?

How Does Chapter 13 Bankruptcy Work?

How Does Chapter 13 Bankruptcy Work?

Chapter 13 bankruptcy works very differently from a Chapter 7 bankruptcy case. When you file for Chapter 13 bankruptcy you are repaying your creditors anywhere from 0% to 100% of your debt back. In a Chapter 13 bankruptcy your creditors are all listed in your bankruptcy case and a plan is proposed that offers to repay creditors a certain percentage of the debt back based on your disposable income. The plan ranges from 36 to 60 months and offers several advantages that are not available in a Chapter 13 bankruptcy. The amount that is proposed to be paid back to creditors will vary depending on each persons income, family size and additional factors. To better understand how a Chapter 13 repayment plan is proposed, below is an example of a possible Chapter 13 payment plan.

Example: Dan is married and has 2 children. He is earning $80,000 a year in income and his wife is a stay at home parent. Monthly Dan is making $5,500 after taxes are deducted from his paycheck. Now the following are his monthly necessary expenses.

Rent: $1500

Utilities: $350

Food: $750

Clothing: $100

Medical: $120

Gas: $500

Car Insurance $150

1st Car Payment: $350

2nd Car Payment $400

Car Repairs $100

Recreation $100

Miscellaneous $100

Donations $300

Assuming these are his only monthly necessary expenses then his remaining monthly income would be around $680 after deducing for necessary expenses. Dan owes $80,000 in credit card debt, medical bills and personal loans. In a Chapter 13 plan Dan would propose to pay a monthly payment of $680 a month for a period of 36 to 60 months. (The required plan length will depend on your last 6 months of income and your family size). Although Dan will not repay all of his debt back, at the end of the plan time the remaining amount will be considered discharged as part of the Chapter 13 bankruptcy. In this case Dan will only be paying a percentage of his debt back to creditors. (The above is intended to be a simplified example of a Chapter 13 repayment plan. What are allowable deductions for rent, food, and other necessities vary with the region you live in and family size).

An attorney is generally involved in drafting a proposed Chapter 13 repayment plan that is then filed with the court and served on all of your creditors. The creditors in turn have a right to file a claim in your Chapter 13 bankruptcy to receive payment through your plan. If they fail to file a claim in your bankruptcy case then they will not be able to collect payment outside of the case. Once the case is filed you are protected from creditors seeking collection through calls, lawsuits and judgments. Your first plan payment is due 30 days after the filing of your bankruptcy case. The monthly payment will be utilized to pay creditors who file a claim in your bankruptcy case. Through a Chapter 13 bankruptcy a person can aggregate all of their creditors into a plan where they provide one monthly payment that the trustee is generally in charge of distributing to creditors.

The benefits of a Chapter 13 bankruptcy include

Repaying Arrears- If you are behind of your mortgage payments a Chapter 13 plan allows you to repay the past due amounts over the course of 36 to 60 months. Chapter 7 bankruptcy does not offer you the opportunity to repay these amounts over time.

Repaying Priority Debts- If you owe income taxes, child support, or alimony, then Chapter 13 bankruptcy can offer your the opportunity to repay these debts over time.

Remove Second Mortgage- You can remove your second mortgage from your home and have it treated as unsecured debt as part of your Chapter 13 bankruptcy. If your home is worth the same or below what the balance on your first mortgage is then you can strip your second mortgage from your home.

If you are considering filing for Chapter 13 bankruptcy please consult a local bankruptcy attorney who can advice on whether this is a good option for you.

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