Chapter 13 Bankruptcy
Chapter 13 involves repayment of your debts, in whole or in part, over a three- to five-year payment plan. A trustee takes your payments and distributes the money to your creditors. After completion of your plan, you receive a discharge.
If you are facing foreclosure or repossession, you can propose to catch up your back-owed payments through the plan. Also, you can restructure certain debts, such as mortgages secured by investment property and car notes that are more than two-and-a-half years old. You may be able to pay your unsecured creditors pennies on the dollar, and emerge from your plan with a discharge of your remaining debt.
How long your Chapter 13 plan lasts and how much you pay depends on your income and debt. If you have unexempt assets, your plan must pay at least what your creditors would get in a Chapter 7 — that is, if the assets were liquidated.
What Are The Requirements For Filing Chapter 13?
You can file Chapter 13 if you meet the following criteria:
- Your debts are consumer debts.
- You have disposable income to repay some or all of your debt.
- Your total secured debts are less than $1,149,525.
- Your total unsecured debts are less than $383,175.
- You are current on your federal and state income filings.
- You have not filed Chapter 7 in the last four years and received a discharge, or filed Chapter 13 in the last two years and received a discharge. (If this applies to you, you can still file Chapter 13, but you are ineligible for a discharge; you can organize your debt into a repayment plan, but any unpaid debt will remain due after your plan ends.)
Should I File Chapter 13?
You might consider Chapter 13 if any of the following situations apply:
- You earn too much income for Chapter 7, but need the protection of bankruptcy.
- You want to organize your debt into a repayment plan that freezes interest and (for some debts) restructures the payments.
- You own a home with a second mortgage that is fully underwater.
- You own investment property or a second property and want to restructure the mortgage secured by it.
- You have substantial nondischargeable debt (e.g., taxes or student loans) that can be repaid in a Chapter 13 plan on more favorable terms.
- You are behind in your mortgage and want to stop or avoid a foreclosure.
- You have unexempt assets that you do not want to lose in a Chapter 7.
The Chapter 13 Process
Once you file Chapter 13, your creditors are given a deadline to file proof of the amount owed to them. After the deadline passes, any debts for which proof was not filed are generally barred from the plan.
You will also need to attend a meeting of creditors, during which you will be questioned under oath by the bankruptcy trustee and any creditors who appear. After your plan is confirmed, you will not be able to borrow money or sell assets without approval from the trustee and bankruptcy court.
After successful completion of your plan, you receive a discharge, which relieves you of the obligation to pay any remaining debt.
I Am In Foreclosure. Should I File Chapter 13?
Once foreclosure proceedings have begun, negotiating a catch-up plan with your bank is often difficult. A Chapter 13 will allow you to catch up your mortgage and save your home by paying your arrearage over the term of the plan. As long as your plan is fair to your creditors and compliant with the law, it will be approved, even if the bank opposes it.
During the course of your plan, you will need to pay your regular mortgage payments, taxes and insurance in addition to your plan payments. If you fall behind in these payments, your case may be dismissed, or the bank may ask that the stay be lifted so it can resume foreclosure proceedings.
You may have other options available to you besides Chapter 13 such as loan modification. However, if a court date or sale has been scheduled in your foreclosure, a pending loan modification will not be grounds to stop the proceedings. A Chapter 13 bankruptcy will, due to the automatic stay.
Why Bother With A Chapter 13 If I Can’t Do A 7?
Even if you would prefer to file Chapter 7 but can’t due to your income or assets, filing Chapter 13 will invoke an automatic stay of debt collection activities, giving you the opportunity to catch your breath and figure out your next move.
In addition to possibly preventing foreclosure, as described above, there are other useful tools unique to Chapter 13. You can convert home equity loans that are totally underwater into unsecured debt, a process called “lien stripping.” For some secured debts (but not residential mortgages or car loans less than 2.5 years old), you can reduce the balance owed to the value of the property, a process called “cram down.” With a cram down, you can restructure the amount owed over the term of your plan and adjust the interest rate.
Contact An Experienced Illinois Bankruptcy Attorney
If you’re considering Chapter 13 bankruptcy, contact bankruptcy lawyer Brian Hiatt in Kankakee County, to discuss whether you should file for bankruptcy protection. Call his office in Bourbonnais 815-304-5441 or email the firm directly.
Brian G. Hiatt’s law firm is a debt relief agency. It helps people file for bankruptcy relief under the Bankruptcy Code.