Chapter 13 bankruptcy allows individuals to reorganize their finances while under the protection of the bankruptcy automatic stay.
Chapter 13 filers make full or partial repayment to their creditors, usually over a period of three to five years. After making payments for the required period, many remaining debts are discharged.
Why File Chapter 13 Bankruptcy?
Why would a person file Chapter 13 bankruptcy instead of Chapter 7? There are usually four reasons.
- Too much income: A person might have too much income to file Chapter 7.
- Non-exempt assets: A person’s assets might exceed the value they can keep (or “exempt”) when filing bankruptcy. By filing Chapter 13, they are usually able to keep these assets by paying the non-exempt asset value through the bankruptcy repayment plan.
- Chapter 13 relief: A person needs a kind of relief that is only available in Chapter 13.
- Timeline: A person needs time to catch up on payments for assets they want to keep or to pay debts they cannot discharge in bankruptcy.
Advantages of Chapter 13
Chapter 13 offers additional advantages as well. Some of these types of relief are only available in Chapter 13. The advantages of Chapter 13 include:
- Chapter 13 allows you to stop foreclosure and catch up on past due payments.
- Chapter 13 allows you to stop car repossessions and catch up on payments.
- A “cramdown” in a Chapter 13 bankruptcy (only available for some assets) allows you to reduce the principal balance of a debt to the value of the property securing the debt.
- Chapter 13 lien stripping allows a person whose first mortgage exceeds the value of their house to remove or “strip off” junior liens, such as second or third mortgages.
- Chapter 13 payment plans are based on your ability to pay, which allows you to make manageable payments on non-dischargeable student loans.
- Chapter 13 stops credit card interest.
- Chapter 13 allows you to avoid new debt lawsuits and stop ongoing debt lawsuits while you are under the protection of the bankruptcy court.
- After making your required payments for the full length of your plan, you can discharge many remaining unsecured debts at the end of your repayment plan.
Chapter 13 Bankruptcy Gives You Time To Catch Up On Your Payments
A person filing bankruptcy might have non-dischargeable debts such as recent taxes or past due domestic support obligations. They might need to catch up on mortgage payments or vehicle payments while keeping their house or vehicle. Chapter 13 gives you time to catch up on these obligations. A typical Chapter 13 repayment plan is 36 to 60 months.
How Long Will My Chapter 13 Plan Last?
A bankruptcy filer can propose a three-year repayment plan if their income is less than the state's median income for their household size. If a bankruptcy filer’s income is more than the median income for their household size in their state, the repayment plan will typically last five years.
“Income” for these purposes is the average monthly household income in the six months preceding the bankruptcy filing date.
How is My Chapter 13 Payment Amount Calculated?
Now you know how long you must make payments, but how much are these payments going to be? That depends on your income, expenses, assets, and types of debts.
Some debts must be paid in full through the bankruptcy repayment plan. Some plans are calculated based on a person’s “disposable income.” Some plans are calculated based on the value of non-exempt assets.
Some of the items that must be paid in a Chapter 13 repayment plan include:
- Some federal and state back taxes
- Past due domestic support obligations
- Past due amounts on secured debt payments for property you are keeping (called “arrearages”)
- Other secured debts like tax liens
- Ongoing payments on your home and vehicles, if you want to keep them: Often these payments will be made directly to the creditors, but they are still considered part of your bankruptcy plan.
- Ongoing tax and domestic support payments that come due each month
- Non-exempt assets: Any unsecured, non-priority creditors must receive at least as much as they would have received if those assets were sold. This issue may arise if, for example, a person has a home with a lot of equity (although California has generous home equity exemptions).
These calculations may sound complicated, but they are much easier to understand when applied to a person’s actual situation. California bankruptcy attorney Karen Ware offers a free initial phone consultation and will be happy to explain how these calculations would apply to your specific situation.
Schedule a Free Consultation
To schedule a free consultation with Karen Ware, call 805-284-0760 or 818-668-9019 or use our online scheduling tool.