What is Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy is a payment arrangement that allows you to pay back debts, including your missed mortgage or auto loan payments, over time. Chapter 13 stops foreclosure, collections, and lawsuits. Most debts are repaid interest and penalty free. If you are behind on a mortgage loan or car loan, Chapter 13 may be the last opportunity to save your home, car, or other property.
Higher-Income Chapter 13. Chapter 13 can also be a good solution for people who do not qualify for Chapter 7 bankruptcy because their incomes are too high. However, it is not limited to high-income earners. Chapter 13 can help many wage earners save their property and get back on track financially. See below for some of the benefits of Chapter 13.
Business Chapter 13: Although Chapter 13 is designed for individuals, it can sometimes help sole proprietors of small businesses weather tough economic times by stretching out payments to creditors. (Incorporated businesses wishing to restucture debt must file under Chapter 11 or its Subchapter 5.)
The initial process is similar to Chapter 7 in that you must file a petition, schedules, and other documents detailing your financial situation. However, under Chapter 13, you also submit a plan showing how much you will pay each month, how long it will take, and how much each creditor will get.
The typical Chapter 13 plan is 36 to 60 months. If your income is below the Pennsylvania state median, you may submit a 36-month rather than a 60-month plan. Your payment is determined by your disposable income, which is the income left after paying allowable expenses (e.g., housing, utilities, etc.).
To qualify for Chapter 13, you must show that you have sufficient regular income to pay back at least a portion of your debt. However, because you are not necessarily required to pay back your unsecured creditors at 100%, you may not need as much income as you believe to use Chapter 13 to save your home, vehicle, or other property.
There are many advantages to Chapter 13 that are not available under Chapter 7. Chapter 13 may enable you to do the following:
Save your home or car. The primary advantage of Chapter 13 is that it may allow you to save your home or car. If you are behind on your house or auto loan payments, Chapter 13 will let you catch on the missed payments up over time.
Pay back only a portion of your unsecured debt. Although most secured debts (e.g., mortgage and auto loans) must be paid back at 100%, many unsecured debts (e.g., credit cards, signature loans, etc.) are entitled to a much smaller amount or even nothing. How much you pay back depends upon your disposable income, the length of the Chapter 13 plan, and the value of any property that would not be exempt under Chapter 7.
Pay back unsecured debts interest and penalty free: With few exceptions, interest and penalties on unsecured debts are suspended during Chapter 13. If you complete your Chapter 13 plan and receive your discharge, all interest and penalties that would have accumulated since filing are discharged. Exceptions include interest on student loans, some tax liens, etc.
Reduce interest and balance on auto loans and other secured debts. Chapter 13 allows you to reduce the interest rate on some secured loans (other than mortgage loans) to a point or two above the prime rate. Moreover, you can “cram down” some car loans and other debts secured by personal property to the market value of the property. (The remaining debt is paid as unsecured.)
Strip off Second Mortgage Liens. If your second mortgage (or third mortgage, line of credit, etc.) is entirely underwater (i.e., not secured by any equity), Chapter 13 allows you to strip off the second mortgage lien and pay the debt like any other unsecured debt. Because unsecured debts may be paid at far less than 100% in Chapter 13, this ability to strip off liens can save thousands of dollars.
Reduce payments on nondischargeable debt. Some debts are not dischargeable, meaning that they cannot be eliminated in Chapter 7 or at the end of a Chapter 13 plan. Such debts include student loans (usually), certain taxes, etc. However, Chapter 13 does give you a chance to stretch those debts out over time, thus reducing your payment while you are in bankruptcy.
Quick Note: For back taxes, you may be able to eliminate or reduce some penalties in Chapter 13.
Avoid dealing with creditors and debt collectors. Your Chapter 13 payments are made directly to the bankruptcy trustee, who then pays your creditors. Therefore, you do not need to deal directly with creditors.
Protect Co-Signers From Collections. Unlike Chapter 7, if you have co-debtors who are not filing for bankruptcy (e.g., a relative or friend who has cosigned a loan for you), Chapter 13 may prevent the creditor from going after the co-signer.
For additional information on Chapter 13 bankruptcy, visit our Bankruptcy FAQ. If you would like to talk to an experienced bankruptcy attorney about your financial concerns, call Philadelphia bankruptcy attorney Dan Mueller at (215) 248-0989 or use our contact form.