What is Chapter 13 Bankruptcy?

A chapter 13 bankruptcy is sometimes described as a “wage earner’s plan.” If you have a regular income chapter 13 gives you the opportunity to create a plan to repay all or part of your debts over a period of time. A chapter 13 plan is something like a debt management plan, but it is one that your creditors are forced to accept. As long as you meet all your obligations under the plan, creditors are not allowed to take any collection actions against you.

Chapter 13 plans generally last three to five years, depending on your income. If you earn less than the state median, the plan will generally run for three years. If you earn more than the state median, the plan will generally run for five years. (The median income in the District of Columbia right now is $42,270 for a one-person household and $68,892 for a two-person household.)

During the course of the chapter 13 plan you will be required to pay over to the trustee all of your “disposable income.” Disposable income is the amount left over after paying reasonable living expenses for you and your dependents. The trustee will then distribute that money to creditors according to the terms of the plan. Upon completion of the payments called for in the plan, you will be released from liability for the remainder of your dischargeable debts.

A Chapter 13 bankruptcy is available to individuals with less than $360,475.00 in unsecured debt and $ 1,081,400.00 in secured debt.

Chapter 13 offers a number of advantages over chapter 7. Probably the most important advantage is that chapter 13 can provide you with an opportunity to save your home from foreclosure.

Other advantages include:

(1) Keeping Your Assets. Under a chapter 13 plan, as long as you make your plan payments you can keep your home, vehicle, and other assets.

(2) Curing Your Loan Delinquencies. Chapter 13 allows you to cure your late payments by gradually catching up on past due amounts. Throughout the course of the plan you will need to pay both the regular monthly payment and also a certain amount extra each month. Paying this “extra” amount allows you to gradually catch up on amounts that were overdue at the time of the filing of the bankruptcy.

(3) Co-signer Protection. If someone co-signed for any of your consumer loans, these co-signers are usually protected. Under chapter 13, creditors usually cannot collect from co-signers until the chapter 13 case has ended. In contrast, under chapter 7 creditors have the right to demand payment from co-signers immediately.

(4) Filing Chapter 13 More Often. By law you can file chapter 7 only once in 8 years. However, under chapter 13 you are allowed to file more often as long as the filings are made in good faith (that is, that you actually intend to set up a three to five year plan and repay a portion of your debts).

(5) Chapter 13 Bankruptcy “Cram Down.” One additional benefit of filing for chapter 13 is the “cram down.” In many cases the value of an item is much less than the balance you still owe on it. By “cramming down” your debt, you are required to pay only what your property is actually worth, as opposed to the amount you owe. Cram downs can help reduce the total owed on vehicles, work equipment and other secured purchases.

While chapter 13 has many benefits, it also has challenges. The most significant challenge is that you are subject to administration by the trustee for the entire length of the plan. You must give up control over all your disposable income for three to five years. (That does not mean that you will live in poverty. Income is only “disposable” after living expenses are deducted.) You will be required to establish and live under a firm budget during the repayment period. And there are some additional costs involved beyond just debt repayment, as the trustee is entitled to a commission on payments to creditors.

Nonetheless, for the unique benefits it provides, chapter 13 should be strongly considered for certain debtors. This is especially true those trying to avoid foreclosure on a home.

For more information, give me a call at (202) 559-0259 to set up a free consultation.