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Chapter 13 bankruptcy - How to keep assets and repay debt

Posted on: 09th Nov, 2005 02:27 am
When you're experiencing debt problems and cannot make the payments in full, or as fast as your creditors want, you might want to file Chapter 13 bankruptcy. To learn what it's all about, take a look at the Chapter 13 bankruptcy information below:

Chapter 13 bankruptcy definition

Unlike Chapter 7, Chapter 13 bankruptcy doesn't require you to sell off assets to pay off your debts. Instead, the court appointed trustee negotiates a repayment plan with your creditors that will allow you to repay your debts within 3-5 years. Chapter 13 is essentially a court supervised repayment plan.

When to file Chapter 13

You can file chapter 13 if you're in any of the following situations:
  • Your debts cannot be discharged in Chapter 7.
  • You have property lien exceeding the value of the collateral.
  • You haven't filed taxes for years.
  • You intend to pay off your dues on mortgage/car loan.
  • Your total asset value exceeds the exemptions.
  • Your income is high enough for filing Chapter 7.
  • Most of your assets are non-exempt, and may lose them if you file chapter 7.

How to qualify for Chapter 13

You qualify for Chapter 13 bankruptcy if you satisfy the following:
  • Credit Counseling: You must enroll in a credit counseling course 6 months before filing Chapter 13.

  • Means Test: Your gross monthly income should exceed the State Median Income of your family size. Find out more on how to check whether you qualify for Chapter 7 or 13.

  • Secured and Unsecured debt: In order to qualify for Chapter 13, you must have less than $360,475 in unsecured debts and less than $1,081,400 in secured debts.

  • Previous filing: You can file another Chapter 13 case 2 years after a previous Chapter 13 case has concluded and 4 years after Chapter 7 case has been discharged.

How Chapter 13 Plan works

In addition to the other filing requirements for Chapter 13, you must also provide a proposed repayment plan either at the time of filing or within 15 days of filing. The proposed repayment plan should also be submitted to those creditors whose obligations will be included in the bankruptcy estate.

Your debts must be repaid according to the statutory repayment priority as given below:
  1. The Bankruptcy Court: The first creditor to be repaid in a bankruptcy case is the court. This includes the filing fees and the money owed to the bankruptcy trustee for his/her services in managing the case.

  2. Support obligations: These are obligations that have arisen due to a court ordered obligation, usually spousal or child support back payments.

  3. Back Taxes: These are any amounts you owe to the IRS or state taxing authorities due to unpaid taxes.

  4. Unsecured creditors: The last group to be paid is your unsecured creditors. In some cases you may be obligated to pay interest to your creditors due to the automatic stay.
When creditors can reject your plan
Creditors can reject your Chapter 13 Plan only if:
  • The Plan materially alters the terms of the debt or requires the disposal of a lien before repayment.
  • The amount offered under the repayment plan is less than the creditor would receive under Chapter 7.
  • The creditors have evidence that the Chapter 13 repayment plan was not proposed in good faith.
Most of the creditor's objections to your proposed plan are resolved through negotiation between your creditors and the trustee. If the parties cannot compromise, the judge decides whose interest should control.

How much to pay in Chapter 13 plan
Most of your creditors, especially the court and any judgment debtors (like an ex-spouse), will be entitled to 100% of the amount you owe them. How much your unsecured debtors are entitled to depends on the amount of disposable income you have to put toward the plan every month and how long your plan lasts. The time it takes for you to repay all of your debts under a Chapter 13 bankruptcy plan depends on how much you can afford to pay each month.

When to start payment
You need to make the first payment to the trustee within 30 days of filing Chapter 13. Within 40-45 days of the 341 meeting with your creditors, the bankruptcy trustee and judge will confirm whether or not your plan is acceptable.

Plan modification & Hardship discharge
You can get the trustee's approval to modify the plan if you have severe hardship like a serious illness or you lose your job. However, if you're unable to complete the plan due to reasons for reasons beyond your control, and if modification isn't possible, you can request a Hardship discharge. In order to get a hardship discharge, your creditors must have received as much as they would have if you had filed for Chapter 7.

Pros and Cons of filing Chapter 13

There are several pros and cons to filing for Chapter 13 are:

Pros:
  • Pay back debts: You repay debts in lower payments.
  • Stops legal action: You are protected from collections, judgments, foreclosure, etc.
  • Retain assets: Real and personal property can be retained.
  • Additional debts discharged: Debts nondischargeable in Chapter 7 can be discharged in Chapter 13. These debts include those for willful and malicious injury to property, debts due to a property settlement in divorce or separation, and those incurred to pay nondischargeable tax liabilities.
  • Protect cosigner: Cosigners on credit cards, payday loans, and other consumer debts are protected under Chapter 13.
  • Tax deduction: You will not have to pay taxes on debt forgiven during bankruptcy.

Cons:
  • Tax Liens: You will not be able to avoid paying any tax liens during Chapter 13.
  • Dismissal: If you stop making payments under Chapter 13 Plan, the court can dismiss your case or convert it into a Chapter 7 bankruptcy. Your case can also be dismissed if you don't pay post-filing obligations such as alimony, child support, or taxes. Learn about Chapter 13 dismissal.
  • New credit: You cannot take out new credit and incur new debt without court approval.
Chapter 13 bankruptcy helps you restructure your debt payments and become current on your debts. Chapter 13 has less of an impact on your credit score than Chapter 7. However, prior to filing, make sure it is the only way you can get rid of your debts.

Related Forum Discussions:
Hi Mary!

Welcome to forums!

As far as I know, the limit for secured debts has not increased. As per Chapter 13 rules, you shouldn't have more than $922,975 in secured debt. In case of unsecured debts, you should not have more than $307,675.

Sussane
Posted on: 23rd Feb, 2009 10:08 pm
I went through a divorce and child support will decrease after my exhusband recieves more parenting time with my child and I am left with a home, three other children and many debts that qualify myself for chapter 13 but how long does this stay on your credit report, and does it vary according toState and judge
Posted on: 01st Mar, 2009 11:10 am
Hi mandy,

As far as I know, Chapter 13 bankruptcy will stay on your credit report for 7 years. It will also reduce your credit score by 200-250 points. The rules of Chapter 13 may vary from state to state.
Posted on: 01st Mar, 2009 09:29 pm
I owe back taxes from 2006, should I wait till April 16th to file my chapter 13 bankruptcy?
Posted on: 03rd Mar, 2009 08:56 am
Well, in bankruptcy, your back taxes will not be fully forgiven and you will be liable to pay them off. I would suggest you to contact your bankruptcy attorney and take his opinion in this regard.
Posted on: 03rd Mar, 2009 10:06 pm
In filing my 2008 taxes this april 15th, I expect to owe $30,000 of which I don't have. I also have very large unsucered dept. I do own some property that would cover my taxes and a small portion of my other dept. My question is, under chapter 13 will I be able to include 2008 taxes, or to say my bankrupsy cannot procede until I have paid them? I read that the prior year to filing must be paid in full??? i have paid my 2007 taxes in full. Can someone please clairify? Please help. I know I wil have to file bankruptcy as I will no longer be able to magage my existing debt.
Posted on: 03rd Apr, 2009 11:51 am
Hi jimmy!

Welcome to forums!

As far as I know, back taxes are not discharged when you file bankruptcy. You'll have to clear off your back taxes. If you are facing hardship in paying off the taxes, you can contact the IRS and go for a payment plan. This will help you in clearing off the taxes.

Feel free to ask if you have further queries.

Sussane
Posted on: 05th Apr, 2009 08:18 pm
I have filed for bankruptcy chp. 13. I got addicted to games using money, my debt got out of control. I want to know will this be held against me when I got to court?
Posted on: 20th Apr, 2009 04:06 pm
When you go to the court, the bankruptcy court will judge your financial situation and then decide whether you would be able to file bankruptcy or not.
Posted on: 27th Apr, 2009 01:49 am
After filing chapter 13 bankruptcy filling, due I still have to pay taxes on foreclosed properties ( I have 2 properties, foreclosed on both) or this filling will shield me from paying taxes on the diferrence between the loan value and selling value/mkt value that is consider income for me next year.
Posted on: 30th Apr, 2009 03:17 pm
Yes, you will have to pay the taxes. Bankruptcy will not help you in discharging your taxes.
Posted on: 01st May, 2009 12:13 am
We will be one year into our chapter 13 in August. We are currently leasing our home and would eventually like to buy it. We have a good income (around 95,000/yr). About how long will it take us to find a mortgage company willing to take a risk on us? We have not accumulated any additional debt, so our monthly expenses are low. Thank you!
Posted on: 09th May, 2009 07:10 pm
Welcome wagmore,

You can get FHA loan after 1 year of discharge of your Chapter 13 bankruptcy. If you are planning to take a conventional loan, you would have to wait for 2 years.
Posted on: 10th May, 2009 11:05 pm
As regarding real estate, how far back must a petitioner report on his/her past transfer and/or sale of a parcel?
Posted on: 11th May, 2009 02:34 pm
Hi Mitchell,

This may vary from one case to another. Your attorney will be the best person to answer your query. I would suggest you to contact an attorney and take his opinion in this regard.

Thanks
Posted on: 11th May, 2009 08:44 pm
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