Chapter 13

Our experienced, friendly attorneys have assisted numerous individuals file for bankruptcy and start over.  At A Better Way Bankruptcy, we have the expertise and background to successfully handle your bankruptcy matter.

Chapter 13 - Personal Reorganization

Chapter 13 bankruptcy, also referred to as a "wage earner's plan," is ideal for individuals who earn a regular income and want to restructure their debt.  Chapter 13 allows individuals to develop a plan where they repay some or all of their debt over a period of three to five years.  Debtors generally make payments on their debt to creditors in installments, such as monthly payments.  However, the court must approve the proposed repayment plan before the plan becomes effective. 

Once the plan is approved, most creditors are legally prohibited from beginning or continuing collection efforts during the three to five year period.  The debtor then makes regular payments to the Chapter 13 trustee, who disburses the money received from the debtor to creditors.  After completion of the payments, the debtor is released from liability for the remainder of the debtor's dischargeable debts.

Eligibility Requirements

To qualify for Chapter 13 bankruptcy there are several requirements that must first be met, such as the following:

• Individuals:  Chapter 13 is only for individuals, not for partnerships or corporations. 
• Income:  Individuals must be receiving a regular income.
• Unsecured debts:  Unsecured debts are debts such as medical bills, credit cards, signature loans, and charge accounts.  To qualify for Chapter 13, individuals cannot have unsecured debts that exceed $250,000. 
• Secured debts:  Secured debts, such as home mortgages and liens, are debts where collateral is given.  Collateral is property, such as cars, trucks, homes, land, mobile homes, furniture, or other household items, where the creditor can take back the property if the debtor does not pay the outstanding debt.  Common types of creditors include banks, savings and loans, or finance companies.  To qualify for Chapter 13, individuals cannot have secured debts that exceed $750,000.

Chapter 13 Bankruptcy Process

Individuals must prepare a budget of income and living expenses and a plan to pay creditors.  The plan, along with other necessary paperwork, is then filed with the bankruptcy court.  The court then appoints a trustee, who reviews the paperwork and meets with you and your attorney at The First Meeting of Creditors.  At this meeting, the trustee will ask about your financial situation, and creditors may attend but generally do not appear. 

The next court appearance you may have to make is The Confirmation Hearing, where the bankruptcy judge will approve or deny the plan to repay creditors.  If the judge approves the plan, a portion of your monthly income is given to a bankruptcy trustee who pays the creditors.  If, however, the judge does not approve the plan, one of three things can happen to your Chapter 13 bankruptcy filing:

• Amendments:  Your plan can be amended, and once this is done you can ask the judge to approve your amended plan.
• Conversion:  You can covert your Chapter 13 bankruptcy into a Chapter 7 bankruptcy, also known as a liquidation process.
• Dismissal:  Your Chapter 13 bankruptcy can be dismissed. 

Role of the Chapter 13 Trustee

In general, after the necessary paperwork is filed with the bankruptcy court, a trustee will be appointed by the court, who is responsible for reviewing the paperwork filed with the court, asking about your financial situation, reviewing the proposed plan for repayment, and receiving monthly payments from you and disbursing them to the creditors.

Dischargeable or Cancelled Debts

Not all debts under Chapter 13 are discharged.  Certain debts such as the following are not discharged under Chapter 13:

• Child support;
• Student loans;
• Damages arising from driving while intoxicated or under the influence of drugs, where death or injuries are caused; and
• Criminal restitution, which is debt a person incurs after committing a criminal act that causes damages or injuries.  

Advantages of Chapter 13

There are several advantages to filing for Chapter 13 bankruptcy, such as:

• Most debts, except those that are not dischargeable, are canceled:  For Chapter 13 payment plans you do not have to pay 100 percent of all your debts.  Rather, the plan you develop can pay all or a portion of your debts.  The payment you make is based on your monthly income, living expenses, and assets and debts.  If you are unable to pay all of your debts, then you can pay a percentage of your debts, while the remaining unpaid balance is canceled.
• Delinquent payments on your home can be made:  Chapter 13 may help prevent foreclosure for some homeowners.  Individuals can make payments on their homes that are delinquent, so long as these payments are made within a reasonable amount of time.  If required by the terms of the mortgage, these delinquent payments may include interest. 
• All or most of your assets can be saved:  You may hold onto certain assets, such as certain household items, if they are not mortgaged.  You can hold onto items that are mortgaged if you can continue to pay for them. 
• Unwanted collateral (mortgaged property) can be returned to the creditor:  Mortgaged assets--property held as collateral for a debt--that you do not want to hold onto or cannot afford to pay, can be given back to the creditor who holds a lien or mortgage on that property. 
• Co-signers and endorsers cannot be sued:  Under Chapter 13, in most circumstances, co-signers and endorsers are protected and thus cannot be sued once a Chapter 13 filing is made.  This means that there is more time to make plans to pay those creditors.  However, co-signers and endorsers may have to pay a part of the debt, and if they refuse, a lawsuit could be filed against them.      
• Consolidate payments without further borrowing:  One monthly payment is made to the Chapter 13 trustee, and no further borrowing is necessary.  The trustee receives the payment from the debtor and disburses the money to the creditors.   
• Creditors are prevented from collecting debts:  Once a Chapter 13 bankruptcy is filed, an automatic stay is imposed, similar to an injunction.  This stay prevents creditors from taking any further steps to collect debts.  Essentially, creditors cannot call, write, file lawsuits, garnish, or foreclose on property. 
• Interest rates and monthly payments may be lowered on secured debts:  When individuals borrow money, generally a note and security agreement, such as a mortgage, must be signed.  The terms of the note and mortgage often require individuals to put up assets as collateral, pay a specific interest rate, and pay a monthly amount.  The benefit of a Chapter 13 bankruptcy is that it may reduce your monthly payment and the interest rate on those secured debts.  Payments may be made over a three to five year period. 
• No interest is paid on unsecured debts:  Under a Chapter 13 repayment plan, service charges, carrying charges, late charges, or interest do not have to be paid on unsecured debts.
• Overdue taxes can be paid:  Under the repayment plan taxes are paid.  Taxing authorities, however, are prevented from seizing or garnishing items you own.

Disadvantages of Chapter 13

Although there are several advantages to filing for Chapter 13, there are still some disadvantages as well.  These disadvantages include:

• Difficulty predicting monthly income and monthly living expenses:  Since individuals may experience life-altering events, such as unemployment, reduction in salary, illness, and other unexpected expenses, it is sometimes difficult to predict monthly income and living expenses.
• Borrowing or using credit:  While a person is in Chapter 13, the debtor cannot borrow or use credit without court approval.
• Credit record:  Chapter 13 will be on your credit record for ten years.
• Wage assignment: Some Chapter 13 trustees may require the debtors' employers to give wage assignments and send plan payments directly to the trustee.
• House notes:  Under Chapter 13, when your house is the only collateral you cannot change the amount of your house note.  If other assets are mortgaged in addition to your house, the monthly note can be modified. 

Common Inquiries Regarding Chapter 13

Many individuals have similar questions regarding Chapter 13 bankruptcies.  To better assist people who may be considering filing for Chapter 13, here are some answers to some frequently asked questions:

• Q:  What factors should I consider in filing for Chapter 13?
• Do I have regular monthly income?
• Is there any money left over after my living expenses?
• Can I pay unsecured creditors more in Chapter 13 than in Chapter 7, otherwise known as a liquidation proceeding
• Q:  Can creditors object to my plan?
• Yes, creditors receive a summary of your plan by mail, and thus can object to the plan and have a hearing before the bankruptcy judge.
• Q:  When do my payments to the trustee begin?
• Payments begin thirty days from filing the Chapter 13 plan.
• Q:  When I complete my Chapter 13 payments, what happens afterwards?
• The unpaid balance of the debts is canceled.
• Q:  May I pay certain debts directly to creditors?
• Yes, you may pay certain debts directly (outside of the plan) to creditors and not send the payments to the Chapter 13 trustee.  A good example of this is your monthly house note. 

For a team of experienced, approachable, and committed bankruptcy attorneys in Michigan, contact A Better Way Bankruptcy for a free initial consultation today.