How a Chapter 13 Bankruptcy Works
A Chapter 13 bankruptcy is a 3 to 5 year repayment plan. A person will generally file a Chapter 13 bankruptcy if either:
They are behind on their house and want to keep their house
They are behind on car payments and want to keep their car
They are above the Means Test
They owe a lot of taxes
They owe a lot of student loans and are having their wages garnished and / or
They have a lot of non-exempt (unprotected) equity in assets
The Means Test is basically a calculation of your household income over the past six months compared to the median for the state where you live. If the household income for the past six months exceeds the median, your disposable income will be reviewed. If a debtor exceeds the median income, the Chapter 13 plan will be paid over a 5 year or 60 month period.
The Chapter 13 bankruptcy plan will include the amount you are behind on your home, your monthly house payments to your mortgage company, your auto loans, taxes and a percentage of unsecured debts including credit cards, personal loans, medical bills, old repossessions and old foreclosures. A monthly payment will be determined based upon your disposable income and you will make this payment each month to the Bankruptcy Trustee, who will then distribute the money to your creditors based on federal laws.
Your House Payment in Chapter 13 Bankruptcy
As mentioned above, one of the most common reasons someone may file a Chapter 13 bankruptcy is because they are past due on their mortgage payments. A Chapter 13 bankruptcy allows you to pay the arrearage back on your home over the course of your bankruptcy plan. You typically save a lot of money paying the arrears back in the bankruptcy because you will likely pay back the amount past due at 0% interest instead of the high interest rate the mortgage company may be trying to currently charge you.
In a Chapter 13 bankruptcy you would make one payment to the bankruptcy Trustee and they would take that payment and divide it up and pay your regular mortgage and a portion of the amount past due each month so that at the end of your bankruptcy you will be current on your mortgage.
Any changes to your mortgage payments, including increases in payments due to interest rate changes, escrow changes, etc. will be sent to the Chapter 13 Trustee from your mortgage company. As a result, your Chapter 13 plan payments to the Trustee may increase or possibly decrease periodically due to changes in your mortgage. The Chapter 13 Trustee will provide you with notice of the change in your Chapter 13 plan payments prior to the effective date of the change.
Your Car Payment in Chapter 13 Bankruptcy
If you are purchasing a car and want to keep it, the amount owed to the finance company for your car will be included in the payment to the bankruptcy Trustee. If you are leasing a car and you want to keep it, you will make those payments directly to the finance company from whom you are leasing the car. Remember, these expenses are considered in determining your Chapter 13 payment to the Trustee.
Difference Between Chapter 13 and Chapter 7 Bankruptcy
| Factor | Chapter 13 Bankruptcy | Chapter 7 Bankruptcy |
|---|---|---|
| Type | Reorganization Bankruptcy | Liquidation Bankruptcy |
| Eligibility | Regular income with the ability to pay off debt over time. | Income below the state median or pass the means test. |
| Debt Limit | Specific debt limits (unsecured and secured debts). | No specific debt limits. |
| Property | Debtors can keep their property and pay off debts over time. | Liquidation of non-exempt assets to pay creditors. |
| Repayment Plan | Requires a 3-5 year repayment plan. | No repayment plan; immediate debt relief upon discharge. |
| Duration | 3-5 years until completion and discharge. | Typically 4-6 months from filing to discharge. |
| Credit Impact | Stays on credit report for 7 years. | Stays on credit report for 10 years. |
| Automatic Stay | Protects against foreclosure, repossession, and other collection activities. | Similar protections, but with potential asset liquidation. |
| Handling of Secured Debt | Debtor can catch up on past due payments and keep the asset. | Debtor may lose the asset unless it’s exempt or reaffirmed. |
| Dischargeable Debts | Discharges most remaining debts after plan completion. | Discharges most unsecured debts quickly. |
| Suitability | Suitable for those with a regular income who wish to keep their assets and can afford a repayment plan. | Suitable for those who have little to no disposable income and fewer assets. |
What a Chapter 13 Bankruptcy Cannot Do
It is also important to note that, just like a Chapter 7 bankruptcy, a Chapter 13 bankruptcy will not wipe out certain debts. These include student loans, most taxes, alimony, and child support. In most Chapter 13 cases, however, taxes, alimony and child support arrears (or back payments) are repaid over the course of the bankruptcy when the Trustee distributes the money to your creditors. Student loans will be reviewed and recommendations will be based on your specific situation, although generally these must be repaid in full.
Also important to know, a Chapter 13 bankruptcy will not change your mortgage payment. Your mortgage payment will stay the same while within the bankruptcy. The only way you can change the mortgage payment is if you get a modification or refinance your mortgage(s). Often times, though, mortgage companies are more likely to work with you in modifying your loans while in a Chapter 13 bankruptcy.
Impact of Chapter 13 Bankruptcy On Your Credit
The impact of a bankruptcy on your credit varies for each person filing. Our firm has filed bankruptcies for thousands of clients. Over the years it seems the most common negative aspect about filing for bankruptcy has been the impact it has on your credit. Your credit score will undoubtedly go down when you file. We’ve discussed that quite a bit before. Most of our clients have found that the negative impact on their credit report usually only has an impact for about two years. If you have a house and vehicles and don’t need to get financing for anything for a couple of years then the impact on your credit may unimportant. We regularly have clients who communicate with us on how quickly their credit rebounded after filing the bankruptcy.
Also, it’s not always easy to file bankruptcy. We have to get a lot of information and paperwork – the courts require it. Sometimes the process can be stressful to get the bankruptcy filed. We understand that and try to have as straightforward and simple a process as possible when working with our firm. It’s safe to say that our clients are usually relieved and happy to get their fresh start after filing bankruptcy.
Completing Your Chapter 13 Bankruptcy
If you make your monthly Chapter 13 Trustee payments and all steps are followed, you will likely receive report of completion of plan payments after your designated 3 to 5 year time period. The discharge means that you have repaid most, if not all, of your debts and you are no longer responsible for any outstanding balances. The exceptions are a mortgage, student loans and on-going alimony and child support. You can begin a fresh financial future.
As you can see, Chapter 13 bankruptcy law is complicated and, for most people, often confusing. Contact us for your free evaluation so that we may guide you through the bankruptcy process.
Chapter 13 Bankruptcy FAQs
Facing financial difficulties can be overwhelming and may leave you feeling lost. However, bankruptcy laws exist to provide relief and a fresh start. Today, we’re focusing on Chapter 13 bankruptcy, answering some of the most common questions you may have about the process in North Carolina.
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy, often called the wage earner’s plan, is a type of bankruptcy that allows individuals with regular income to develop a plan to repay all or part of their debts over three to five years. The advantage is that it allows you to retain your property while restructuring your debt under the supervision of the court.
How Does Chapter 13 Differ from Chapter 7 Bankruptcy?
While both Chapter 13 and Chapter 7 bankruptcy provide debt relief, they operate differently. Chapter 7 allows you to wipe out most unsecured debt quickly, but you might have to give up some property. On the other hand, Chapter 13 involves a repayment plan, often allowing you to keep your property.
How Will Chapter 13 Bankruptcy Affect My Credit Report?
Bankruptcy will have an impact on your credit report. A Chapter 13 bankruptcy will typically stay on your credit report for seven years from the filing date.
How Can I File for Chapter 13 Bankruptcy in North Carolina?
Filing for Chapter 13 bankruptcy involves several steps:
- Pre-bankruptcy Credit Counseling
- Preparation of Bankruptcy Petition
- Filing the Petition
- Trustee’s Meeting
- Confirmation Hearing
- Completion of Plan Payments
- Discharge
For a smooth and successful filing, it’s advisable to consult with an experienced North Carolina bankruptcy lawyer.
Will Filing for Chapter 13 Bankruptcy Affect My Taxes?
Filing for bankruptcy can have an impact on your taxes, and it’s crucial to understand how this works. You might wonder whether you can wipe out taxes in bankruptcy or how bankruptcy changes your tax filing. Generally, older income tax debts can be discharged in Chapter 13 bankruptcy, but recent income tax debts and most other tax debts must be paid in full through the repayment plan.
Can I Keep My Tax Refunds After Filing Chapter 13 Bankruptcy?
Your tax refunds may be considered part of your bankruptcy estate, meaning they might be used to pay your creditors. However, this will depend on your individual circumstances and the local rules in your jurisdiction.
