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A Chapter 13 bankruptcy is the kind where a debtor enters into a repayment program under the auspices of the Bankruptcy Court. This type of bankruptcy, more commonly known as a personal reorganization bankruptcy, can last from three to five years. The client would prepare a monthly budget with their attorney. Any excess income (also known as disposable income) goes into the plan for the duration of the plan. The duration of a Chapter 13 Plan is determined by household income. If the client’s household income exceeds the “median income” for a household of his size, then the client would have to file a five year plan. If the client’s income falls below the median income for a household of his size, then the client would file a three year plan.
In addition to disposable income, the client is also supposed to contribute into the plan 100% of any Federal income tax refunds they receive during the plan. However, the client would be allowed to keep the tax refunds as long as they can demonstrate a need for keeping the tax refunds. Examples of such a need could be a household repair or a post bankruptcy filing medical/dental expense.
For a free consultation to discuss your inquiries with an experienced Chapter 13 bankruptcy lawyer, you can call (313) 417-8422 today.
Chapter 13 Bankruptcy usually, but not always, comes into play in one of the following instances:
A client can file a Chapter 7 if they do not have any disposable income with which to repay their debts. Sometimes however, the client could be caught up in a situation where they make too much money to file for Chapter 7 but do not have enough monthly disposable income to pay the minimum monthly payments required to service his debts. That is when a client would file a Chapter 13, putting his monthly disposable income into the plan. When the plan is over (three to five years later), what is paid is paid and what is not paid the client would not owe anymore except for any unpaid balances on student loans (student loans being non-dischargeable in bankruptcy unless debtor can demonstrate an undue hardship by having to keep the student loans).
A client can only file for a Chapter 7 once every eight years. Occasionally, bankruptcy lawyers experienced in Chapter 13 cases see a situation where a client did a prior Chapter 7, but then due to some unfortunate circumstance (such as a pay cut at work) is forced into bankruptcy again. Because the client filed a Chapter 7 within the previous eight years, their only recourse would be to file for Chapter 13. While in this instance a Chapter 13 is not as beneficial as a Chapter 7 would have been, the Chapter 13 provides the client with relief in the respect that they can pay back some of the debt at a monthly payment they can afford while holding their creditors at bay. When the Chapter 13 is over, what is usually not paid the client does not owe anymore (with the exception of any unpaid balances on student loans).
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The most common reason for a client to be forced into Chapter 13 would be to protect assets that would otherwise be lost if the client filed for Chapter 7. The United States Congress established certain limitations on the amounts of assets a client can protect in bankruptcy in order to obtain a fresh start. For example, a client can currently protect up to $25,150 of equity in their home under the Federal exemption scheme and between $46,124 and $69,200 (depending on their age) under the State exemption scheme. If the client has more than this amount of equity, they would lose their home in a Chapter 7 bankruptcy. A Chapter 7 Trustee would take the house, sell it, pay off any mortgages and/or other liens on the house, give the client their exemption and anything left over would go to the client’s creditors. In order to prevent this from happening, the client would file a Chapter 13 and so long as they pay back their creditors (over the length of the plan) the equivalent of what they would have received had the house been liquidated in a Chapter 7, then the client would be able to keep their home.
A client could file a Chapter 13 plan of reorganization to stop a foreclosure of their home due to an arrearage on their mortgage payment. In this case, filing a Chapter 13 stops a foreclosure sale and allows the client to catch up their mortgage arrearages over time to save their home. Every month, the client would have to contribute into the Plan enough money to cover the current monthly mortgage payment and something more on top of that to catch up the arrearage. Usually the arrearage amount, which does not accrue interest once the bankruptcy is filed, is divided by the length of the Plan. (So if the client files a 36 month Plan, the arrearage amount is divided by 36. If the client files a 60 month Plan, the arrearage is divided by 60 months). This monthly arrearage fraction is then added on to the monthly mortgage payment. Every month, the Trustee collects the payment from the client, pays the current monthly mortgage payment plus the monthly mortgage arrearage fraction such that when the Plan is over, the mortgage is current again.
Filing for Chapter 13 will stop a vehicle repossession and may allow the client to lower their car payment. The client could do this by doing something called a “cram down”. If they are unable to do a cram down, the client might be able to lower their vehicle payment by spreading out the balance owed on the vehicle over a longer time, known as a modification.
What is a cram down? A client could owe significantly more on a vehicle than what the vehicle is worth, in which case they would file a Chapter 13 bankruptcy to reduce what they owe on the vehicle. They reduce what they owe on the vehicle to what the vehicle is worth on the day that they file for bankruptcy. This is called a “cram down”. For example, they might owe $10,000 on a vehicle that has a value of $6,000 on the date that they file their bankruptcy. If they financed the vehicle more than 910 days prior to filing for the Chapter 13, they could “cram down” the amount they owe on the vehicle from $10,000 to $6,000, thereby saving $4,000. HOWEVER, they can only “cram down” the vehicle if they had it for more than 910 days prior to filing the Chapter 13 – so this is only a limited opportunity type of Chapter 13.
What is a modification? If the client has had the vehicle for less than 910 days, they cannot cram down the vehicle. In such a scenario, the client might be able to reduce his monthly vehicle payment by spreading out the car loan over a longer time frame. So for example, the client might have 36 months worth of payments left on their vehicle which they have owned for less than 910 days. Without reducing the balance owed on the car, they could spread out the balance on the car loan from 36 months to 60 months, thereby reducing the monthly car payment. This is known as a modification.
Chapter 13 bankruptcy lawyer Joseph L. Grima will always meet with the potential client individually and after reviewing the client’s financial situation, advise as to whether there is a benefit to filing a Chapter 13 or not. During the same consultation, we will always be able to advise the client as to what the monthly plan payment would be and how long the plan would last. Consultations are always free and generally Chapter 13’s will be filed with $0 down on the attorney fee, with the client ONLY being required to pay the filing fee (currently $310) to the Bankruptcy Court.
Contact our firm today to schedule your free Chapter 13 consultation.
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