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Chapter 13 Bankruptcy: Ultimate Guide for 2023
Why Chapter 13 is Better Fix than Debt Consolidation
Chapter 13 bankruptcy is a repayment plan, like debt consolidation, but it fixes all the problems. It stops interest, stops lawsuits, and best of all, it works.
You don’t want to repay debt, but sometimes you have to. Chapter 13 bankruptcy is when you pay credit debt back, freezing interest, and with peace of mind knowing the credit cards can’t sue you. You usually don’t pay all of your debt, only what you can. Many bankruptcy attorneys don’t do Chapter 13 bankruptcy because it’s complicated. But this bankruptcy lawyer does. Contact me.
But Why – I Don’t Want to Repay
There are a couple of reasons why someone would repay debt instead of just discharging it.
Firstly, Chapter 13 bankruptcy is for people who just don’t qualify for faster bankruptcy relief due to high income. There’s a gatekeeper to Chapter 7 bankruptcy, and it’s called the Means Test. It’s a big long form that pulls in IRS averages for some things, census data for other things.
The bankruptcy means test uses some of your actual data for some things, but gives you a standard deduction for others. Complete the ten pages or so and turn the crank and it tells you if your case will be bankruptcy abuse. Generally, the more income you earn, the more likely Chapter 13 is.
Secondly, some people don’t qualify for to file bankruptcy under Chapter 7 because the reality is that they have money to afford repaying some (not all) of their credit card debt. That is, it’s not fair for someone who can make a debt repayment to pay back none of it.
Finally, some people want a repayment because it forces the mortgage lender to take all the house arrearages over time. It’s a good way to save a house and stop foreclosure.
What is Debt Consolidation?
Debt Consolidation is when you make a too-good-to-be-true payment to a middleman. This middleman has no special powers. They can ask the credit cards to behave and play along, but that’s it. It hurts your credit, but they don’t tell you that.
So you pay something ridiculously low in good faith for a year or two. Then the credit card companies look at the statute of limitations for breach of contract and figure they better get moving.
You get a law suit with a summons that says YOU HAVE THIRTY DAYS TO RESPOND in scary capital letters from Discover or Capital One. When you call your friendly debt counselor, they tell you they can’t stop lawsuits. You need to file bankruptcy! Gee, it would’ve been nice had they told you that from the beginning. You could’ve saved two years and thousands of dollars before having to start over.
In short: people hardly ever get to the finish line of settling all their debts. The success rate is low. Yes, it avoids bankruptcy. But only for a time.
And What is Chapter 13 bankruptcy
At its simplest, Chapter 13 bankruptcy is a fixed payment for a fixed time. At the end of the term, all unpaid credit card is discharged.
It’s generally successful when done right. You can’t be sued. The payment amount is, in general, based on whatever you can afford. It solves all the problems of debt consolidation.
Let’s break it down by elements.
Monthly payments
Chapter 13 is called a “wage earner bankruptcy” because it involves repaying debt. The payments don’t have to come from my client’s paycheck. They can be made from monthly small business profit, pension income, rental income, Social Security/Disability, or any other regular source of income. The key is that the cash flow is positive, and there’s available money to repay credit card debt, and other unsecured obligations.
Note that repayment plan is in stark contrast to a Chapter 7 bankruptcy, which involves no repaying.
Number of Payments
The duration of a Chapter 13 case is usually 60 monthly payments, though in a few situations it can be 36. Also, you can pay the debt back sooner if you can pay all of the debt.
The Payment Amount
Firstly, the Chapter 13 bankruptcy plan payment amount is typically whatever the debtor can reasonably afford. It’s as simple as this, and as complicated as this. What about income that varies? How do you calculate monthly expenses? A key point of expenses is that they must be reasonable and necessary. If you say your budget surplus is small because of that expensive timeshare payment, the Chapter 13 Trustee can object to that so that your payment is now more.
Secondly, the payment amount can also be increased by a liquidation analysis. If in a Chapter 7 bankruptcy some of your home equity would have gone to unsecured debt, your Chapter 13 payments have to cover at least that amount.
Finally, the kind of debt you have can drive the payment amount. For example, you usually have to pay back all your recent taxes. You also need to repay any mortgage arrearages. If you’ve dug a hole of lates for these particular types of debts, your shovel has to be big enough to fill it back in within sixty months.
Who Gets the Chapter 13 Bankruptcy Payments
In Chapter 13 bankruptcy, you’re paying a Chapter 13 Trustee. This is a skilled, efficient administrator for your case appointed by the Department of Justice’s United States Trustee. The bankruptcy trustee then distributes the payments to your various debts; they’ll all get paid something.
Ok but Who Gets Paid
There’s a pecking order in how the trustee repays your debt. Firstly, you pay your tax priority debt dollar on the dollar. Secondly, you’ll pay any house lates, also dollar on the dollar. Sometimes we add car loans to a bankruptcy, but generally not. Finally, any nonpriority unsecured debt (typically credit cards) get any leftover scraps that your monthly payments can still pay. So no, you don’t repay all debts equally. However, each class gets the same percentage.
Payment Plan Percentage
In consideration of the above, you don’t have to repay all your credit card debt in five years, unless you can. I’ve had clients who paid back all their unsecured loans. I’ve had other clients who paid less than a penny-on-the-dollar of their credit cards. It just all depends on the individual situation, and of course, monthly budget.
As you can see, there are a lot of moving parts. It’s quite complicated and overwhelming.
Contact us now for a bankruptcy consultation to discuss your situation and how much your Chapter 13 plan payment might be.
READ MORE: See our Ultimate Bankruptcy FAQ
Chapter 13 basics
The bottom line in Chapter 13 is that you pay what you can afford, after reasonable monthly expenses, for a fixed term, typically 60 months, or five years. It’s as simple as that, and as complicated as that. What’s reasonable?
You want someone on your side who knows what is reasonable, and what isn’t. We’ll be honest with you and tell you the truth from the outset. This way you’re not shocked when the trustee or judge has a problem with you spending $1000/month on dining out at Outback.
2023 update: while there’s a Chapter 13 debt limit which can make you ineligible, Congress introduced a new bill S3823 Bankruptcy Threshold Adjustment and Technical Corrections Act which would raise the Chapter 13 debt limit significantly. It did pass, but is scheduled to sunset and end in a year or so.
Is Chapter 13 like Debt Consolidation
Yes, that’s right. Chapter 13 bankruptcy resembles debt consolidation. But it solves some debt consolidation flaws:
- Credit cards can’t give you a law suit; many debt consolidations don’t make it to completion because a lawsuit hits them first.
- The payment amount based upon whatever you can afford (generally); debt consolidation usually doesn’t consider your budget.
- Chapter 13 stops interest from churning. It freezes the balances at filing. This gets you off the interest treadmill so you can pay principle.
But Why Do Chapter 13 Bankruptcy if I’m Current on My Minimums
You’re Debt-Free in Five
Maybe you’re current on your credit card minimum payments. However, it’s all going to interest. In five years from now, without bankruptcy, how much will your credit card balances be? Probably the same as they are now. Pay sixty Chapter 13 bankruptcy payments, and you’re finished. This is true whether you paid back all the credit card debt or not. This is due to the magic of bankruptcy stopping interest.
Chapter 13 Plan Payments Can Be Lower than Credit Card Payments
Chapter 13 plan payments can be cheaper and more affordable than you paying them directly. Why? A contract drives each credit card minimum payment. Consequently, you pay what each one says you must. Add all the minimum payments up and this is often more than you have.
A Chapter 13 bankruptcy doesn’t care what the minimums are. Your budget surplus determines your bankruptcy payment amount.
Some Chapter 13 Case Examples
Let’s see how all this can play out.
Scenario One: A Little Surplus
In this case, say Debbie Debtor earns $5,000 a month, but after her massive mortgage, gas, food and other necessities, she spends $4,600 a month. She hasn’t paid her credit card in months because she just can’t afford them all. Her bankruptcy plan payment would be $400. That’s all that she can afford. It doesn’t matter if her credit card debt is $30,000 or $130,000. She can only afford $400 a month.
Scenario Two: A Lot of Surplus
Say she earns $5,000 a month, and their reasonable household expense are $4,000 a month. They’re paying all the credit card minimum payments, but barely. The credit card balances are $40,000. In this simple example, the Chapter 13 debtor can afford $1,000 a month for sixty months, or $60,000.
That would repay all their credit card debt. Why? Because they can. Consequently, the payment is actually be less than the minimums and less than $1,000, leaving extra money for hobbies or fun.
Scenario Three: Surplus But The House is Late
Chapter 13 bankruptcy can stop foreclosure, but there’s no free house. Take our Debtor from Scenario Two above and just add one little tweak: there are $30,000 of mortgage lates to go with that $40,000 of credit card debt. Debbie Debtor can afford $1,000 a month, which pays the house back first in 30 months.
Then the bankruptcy trustee will distribute her plan payments to the credit cards. The other $30,000 goes to her $40,000 of credit cards. The cards get about 75% and after month sixty, the other credit card debt gets forgiven. And more importantly, the house is saved!
Contact us to for a friendly chat to find out which situation you’re most like.
Process of a Chapter 13
The Petition and Schedules
Once you retain our services, we’ll start preparing the petition. This and the schedules detail your income, assets, budget, and of course all the debts you have. The data entry takes hours, and we’ll review it all at our signing appointment.
The Chapter 13 Plan
We also prepare the Payment Plan. This details how much you’ll pay each month. It also says whether you intend to keep your house and cars. It then tells the creditors how much of their debts each will be getting. All or less than all? The plan spells it out in detail. This is our proposal.
Get Me to the Court on Time
Next, we’ll file your bankruptcy papers with the court. This officially starts the process. You have a case number finally.
Bankruptcy Protection: The Five-Year Cocoon of Calmness
Once we file your case, it’s now illegal and against federal law for your debts to take any action to collect against you. Creditor calls stop. Lawsuits drop dead. The foreclosure is ended early. The creditors will see if the Chapter 13 plan is doable, and if so, must sit back and accept the payments from the trustee. It’s a time of calm, relief, peace of mind. Unlike debt consolidation, you cannot and will not be sued for breach of contract.
We Join You at Court: the 341(a) Meeting of Creditors
Then it’s time to testify. The trustee wants to ask you questions about the papers we signed. Also, she wants to ensure the numbers work, and that your budget isn’t too lean or too extravagant. I personally attend just about all my Chapter 13 Meetings of Creditors. Many lawyers send a stranger to be with you. I’ll personally be there myself.
Bankruptcy Confirmation: Nailing it Down
We will need to provide the Chapter 13 trustee with documents and maybe make changes to the documents. Sometimes at this stage your payment must be increased to get the trustee to be satisfied it’s a fair plan. But then a judge will approve it, confirming our proposal, and hopefully without changing it. At this point you can’t get more debt without court approval. Why? Because you’re supposed to be paying down debt, not getting more of it.
The Payments
The next 4 years or so you just pay the debts back, life is good, no court drama, no creditor calls. Give the trustee your tax refunds, and just make those payments that, by definition, you can afford. 58, 59, 60. Now you’re done! The court discharges all unpaid credit card debt! Or will be.
Oops! Life Changed
During the five years of repayment, if you lose the overtime or worse, your job, we’re still your bankruptcy lawyer. Call us the moment you know something is changing, and we’ll tell you what your options are at that time. Sometimes we can reduce your payment. Sometimes we can change over to a Chapter 7 bankruptcy.
The Discharge
We file some final paperwork that says you did what you were supposed to (with our help and reminding you). The court then grant an Order of Discharge. The case is over, and you can start saving extra money and rebuilding! Hooray!
tl;dr – Chapter 13 Bankruptcy Summed Up
Chapter 13 bankruptcy generally lets you pay what you can on your credit card debt a fixed payment for a fixed time and then the rest of it goes away even if you didn’t pay it all. It can be better than paying your minimums since interest stops accruing.
It can be better than debt consolidation since the credit cards can’t sue you. It’s a way to stop foreclosure and save a house. And every step of the way, I’ll be your attorney to ensure that you get to the fresh start you deserve.
I’ve helped hundreds of our neighbors navigate these waters, confirm their Chapter 13 plan, and get a discharge for a new beginning.
I’d be honored if you contacted me for a consultation.
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