Chapter 13 is a repayment plan that lasts three or five years depending on the debtor's income and financial status. Debtors not qualified to file Chapter 7 because of higher than median income must file a five-year plan. Other debtors may need the full five-year period to effectively reorganize their debts. In Chapter 13, the creditors must be received as much as they would have if the debtor filed a Chapter 7. This means that if the debtor has the property that is not exempt, and he or she wants to keep it, then the debtor must pay an amount into the plan for the benefit of their unsecured creditors, that is equal to, or greater than, the value of the non-exempt property.
Most filers of Chapter 13 use this procedure to save their homes from foreclosure or to pay large past-due tax bills, or large child support arrearages. Some people desire to file a Chapter 13 to save their car from repossession. If keeping a car is your only reason to file a Chapter 13,
Bankruptcy Attorney Miles W. Rich usually does not recommend it, because the transaction costs in a Chapter 13 are very high. Additionally, in a Chapter 13, no discharge is received until the plan is paid in full. Once in a Chapter 13, if the debtor falls behind in his or her trustee payments, the case is dismissed, and no relief is available. Another important fact about Chapter 13 that is not realized by many potential clients is that during the Chapter 13, the Debtor is prohibited from taking on any additional debt without permission of the Court. Chapter 13 also has some unique advantages. If you have multiple mortgages, and your home is worth less than the first mortgage, you most likely will be able to strip out the 2nd mortgage and any third mortgage you have in your plan. This allows a debtor to not only keep his home but reduce the amount he or she owes on it. First mortgage balances cannot be modified in Chapter 13.
Mr. and Mrs. Jones own a home worth $200,000. They owe $160,000 on it, but they are $8,000 behind in their mortgage payments. They have received a foreclosure notice, and are unable to work out a repayment plan with their mortgage holder. They also owe $5,000 in Federal Income taxes and $1,000 in Georgia income taxes. Mr. Jones owes is behind $6,000 in his child support payments to his former wife. The Joneses have a Ford Pickup on which they owe $10,000. Additionally, they $60,000 in credit card debts, and $23,000 in medical bills.
Their regular mortgage payment is (including taxes and insurance), $1,500 per month. Mrs. Jones was ill and was off work, but now she has recovered and is back at work. In order for the plan to work, the Joneses must pay their current mortgage payments of $1,500 each month directly to the mortgage holder. The arrearage of $8,000 will go into their plan.
Additionally, since they have less than five years on their truck payments remaining, that loan must be paid through the plan. The attorney's fee is $4,000, and is paid through the plan. If the Joneses were not behind on their house, they could have qualified, income-wise, to file a Chapter 7, so their plan must last only three years, but it will take four years for them to pay it off because of their disposable income is limited. They will pay through the trustee the following amounts:
$9,500 to the Mortgage Company including $1,500 interest + $12,000 to the Ford Motor Credit on their pickup including $2,000 interest + $6,000 in taxes + $6,000 in child support payments + $4,000 in attorney's fees for a total of $39,500. Added to that is a 5% Trustee fee of $1,975 for a total of $40,975. Based on a 48-month payout, they will need to pay the trustee $853.65 per month, which must be payroll deducted, unless they are both self-employed. In order to have their plan confirmed, with a trustee payment of $853.65 per month, they will need to show that they have this exact amount of extra income after paying their mortgage, their utilities, their food costs, and the other necessities of life. The $83,000 in credit card and medical bills go away, down the drain, like in a Chapter 7; however, if they are required to file a 60-month plan, then the extra money, about $10,237.50 will get divided pro-rata among the credit card companies and medical providers, based on the percentage owed of the $83,000.
Only after the last payment of the plan is paid does the debtor get a discharge and relief from those credit card debts, and medical bills.
A Chapter 13 Debtor must make at least two appearances:
1) At the meeting of creditors as in a Chapter 7;
and 2) At the Confirmation Hearing.
When a debtor files a Chapter 13, he or she must begin making their mortgage payments again with the first payment being due on the first of the month following the filing date. Therefore, if the debtor cannot afford to make their mortgage payments, Chapter 13 will not work for them. Trustee payments also begin at filing, with the first payment due before the 30th day from the date of filing. This means, if you file on June 6th, your first trustee payment is due in full by July 5th. A payroll deduction for the payments is filed but often does not become effective for a month or so. During that time, the debtor must make the payments directly to the trustee. Failure to do so will cause confirmation to be denied, and the case will be dismissed.
The primary pitfall of Chapter 13, is that an emergency arises, someone loses a job, someone gets sick, and the house payment isn't made; or the trustee payment isn't made. If it's a 60-month plan, it is possible to modify and increase the payments, if they can be made. But if not, the case is dismissed, and instead of going down the drain, the credit card company and medical debts come roaring back to life in the form of judgments and garnishments.