Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a solution for people who do not qualify for Chapter 7, and is named from the chapter of the Bankruptcy Code found at Chapter 13 of Title 11 of the United States Code.

People may not qualify for Chapter 7 if their income is higher than allowed in a Chapter 7, have non-exempt assets they want to keep, or a second mortgage such as a home equity line of credit they want to get rid of.

A Chapter 13 helps a debtor lower secured debts.  Example: A debtor has a car worth less than what the debtor owes.  Ask the court to “cramdown” the car loan to the vehicle’s fair market value.  A debtor owes $16,000 on a car but it is worth $9,000.  Have the loan reduced to $9,000.  New payments under the plan will be based on a $9,000 balance versus $16,000.

Chapter 13 requires a court confirmed repayment plan for three to five years.  The repayment plan depends on a debtor’s monthly income and the value of assets a debtor wants to keep. The debtor establishes to the judge enough income to pay priority debts such as income taxes or child support as well as secured debts such as mortgage or car payments for assets the debtor wants to keep.  Example:  Debtor has a vehicle s/he wants to keep.  There is $10,000 non-exempt equity in the car.  The debtor will need to pay minimum $10,000 in the repayment plan to unsecured creditors.

Normally a debtor pays the money left after all allowed expenses are taken care of. Allowed expenses are expenses such as rent, child care, health care, food, clothing, recreation. Allowed expenses for New York areas can be found at the U.S. Trustee’s web site:  http://www.usdoj.gov/ust/.

In a Chapter 13, the court makes sure creditors will not garnish a debtor’s wages or foreclose on a home.  Unless the trustee or a creditor objects to a repayment plan, the judge confirms it after the 341 hearing. If a creditor or the trustee objects, the judge will hold a hearing to assess whether a plan must be modified, dismissed, or converted to another bankruptcy chapter such as Chapter 7.  For example, if the debtor no longer wants to keep certain property, the case may be converted to Chapter 7.  When converted, the debtor needs to go through a 341 hearing again.

If during the three or five year period of the repayment plan a debtor’s income changes, such as when s/he loses a job or otherwise cannot make the plan payments, the Chapter 13 can be converted into a Chapter 7, dismissed, modified, or debts discharged.

At the end of the repayment period in a Chapter, the remaining debts will be discharged.

When contemplating Chapter 13, engage an experienced New York bankruptcy attorney who can advise on the repayment plan process.