What Are the Benefits of Chapter 13?
Everything a Chapter 7 can do a Chapter 13 can do better. But there is a cost in that you commit all of your disposable income for 3-5 years to do what a Chapter 7 can’t. This includes:
- Protect property when you own too much. Assets that would have been lost in a Chapter 7 can be kept in a Chapter 13;
- You can stretch out repayment of an auto or catch up a mortgage over time up to 5 years;
- Sometimes reduce/modify the secured amount of a mortgage (commercial, vacation or second homes);
- Reduce the amount owed on a car loan if
- The loan was not solely for buying the auto or
- The loan is over 910 days old or
- The vehicle is used commercially
- Strip a second mortgage for your primary residence or modify the first mortgage for a commercial or second home;
- Eliminate or manage more types of debts than a 7 such as income taxes, domestic support or student loans even where some fraud may have existed;
- Repay priority debts such as child support or income taxes sometimes without penalties or interest at the expense of unsecured debts;
- Challenge mortgage company claims and fees;
- Protect a cosigner;
- Provide bankruptcy protection because a Chapter 7 is not possible (The Debtor earns too much or finished a Chapter 7 just a couple of years ago);
Chapter 13 Costs
A Chapter 13 can actually be cheaper for a debtor to file than a Chapter 7 if it eliminates a second mortgage or car loan that the Chapter 7 does not. But a Debtor must be a person that owes less than $360,475 in unsecured debt, and under $1,081,400 in secured debt. People that owe over these amounts can’t file a Chapter 13 bankruptcy in Louisville and must file bankruptcy as a Chapter 7 or 11. It is rare, but some people are forced to file as a Chapter 13.
If the Debtor makes so much income that the Debtor could afford to repay a significant part of his debt then he may fail the means test and be required to file a Chapter 13. If the debtor makes less than the average income he may file a 3 year Chapter 13. If the Debtor makes over the average income for his size family he is required to file a 5 year Chapter 13. A Debtor can always stop paying and dismiss a Chapter 13 bankruptcy or he may want to convert it to a Chapter 7 if he cant repay later. Also hardship discharges are sometimes allowed when a debtor later cannot continue to make payments. If the plan is dismissed for the failure to make payments, you go back to owing the original debt and being unprotected. If a Debtor dismisses the Chapter 13 he may not get the automatic stay if he files another Chapter 13 later. In that case the Debtor may have to file a motion to obtain the stay.
Reasons to Choose Chapter 13
Most Chapter 13 bankruptcy cases in Kentucky involve a foreclosure or stripping a second mortgage. If you are attempting to save your home from a foreclosure you normally want to file a Chapter 13 Bankruptcy to catch up the payments. An added bonus to filing a Chapter 13 is that if the second mortgage has NO EQUITY the Debtor may strip the second mortgage in his Chapter 13 plan and at the end of successfully completing the plan the second mortgage will be removed. But there can be reasons other than a foreclosure for filing a Chapter 13 such as:
- When it has been less than 8 years since you last filed a Chapter 7 refer to the Chapter 7 and Chapter 13 time chart to see when you can re-file;
- A Chapter 13 can handle some debts such as debts due to fraud, income tax debt, or student loans that the Chapter 7 can’t;
- Filing as a Chapter 13 will eliminate the penalties and interest for income taxes and you may want to repay trust taxes through a Chapter 13;
- If you couldn’t otherwise keep property such as having too much equity in a home and you exceed the exempt property you can keep. A Chapter 13 only has to repay what the creditors would have gotten if the property was sold;
- Filing a Chapter 13 will stop Student loan collections. However the statute of limitations stops and does not run while you are in bankruptcy. But especially private student loans are stopped from garnish wages or attaching property. Try to make sure it is a 0% plan or that you dismiss and refile the case before anything is paid to a private student loan creditor. Kentucky has a 15 year statute of limitation and repaying anything to a debt restarts the waiting period.
If a debtor’s current monthly income is greater than the average income, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. 11 U.S.C. §1322(d). But if the Debtor earns less than the average income it can be a 3 year plan. Little or nothing may be paid back to unsecured debts in a Chapter 13 plan. Plans often repay 10% or less to the unsecured debts. If a Chapter 13 is filed it may be later modified or converted to a Chapter 7 if the Chapter 13 cannot work. If a debtor cannot qualify immediately for a Chapter 7 or if a debtor is facing future medical or other debts they may choose to file a Chapter 13 initially and later convert to a Chapter 7 after a medical operation or If you have an average income and little in assets such as less than $45,000 in equity in your home, then you probably want to file a Chapter 7. The exemptions that allow you to keep property change from state to state. Over half of the states like Kentucky use the federal exemptions. Indiana, Florida and Texas have their own state rules. You may want to download the manual on how to file for Bankruptcy that explains step-by-step how to file bankruptcy with your lawyer.
Priority non-dischargeable debts such as income taxes, student loans or child support are repaid first in a Chapter 13, tax penalties and interest charges that accrue during the Chapter 13 can generally be discharged and only the principle on the income taxes needs to be repaid in Chapter 13 cases.