by Greg Bennett, Esq.
In my earlier articles, I gave an overview of the most common types of bankruptcy filings and went into some detail regarding chapter 7 bankruptcy. In this article, I will provide a more detailed overview of the second most prevalent form of bankruptcy, the chapter 13 bankruptcy.
A chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals (not companies) with regular income to develop a plan to repay all or part of their debts to creditors over three to five years.
To be eligible for a Chapter 13 Bankruptcy, you must have received credit counseling and fit within the income and debt criteria. The debtor (and spouse, if a joint petition is filed) must owe less than $360,475 of liquidated, non-contingent unsecured debts, and less than $1,081,400 of liquidated, non-contingent secured debts. As part of your bankruptcy filing, you will file schedules of assets, debts and income. You will determine what your plan payment will be by calculating your total income, then subtracting your monthly expenses. The amount remaining will be sent to the bankruptcy trustee, who will send payments out to your creditors on your behalf. For example, if you make $6,000 per month and your expenses are $5,000 (including your mortgage payment going forward), your plan payment will be $1,000 per month.
Filing for a Chapter 13 bankruptcy may benefit you if you are facing foreclosure on your home. When you file Chapter 13, you are entitled to the Automatic Stay in Bankruptcy and all collection activities (including the foreclosure action) will automatically stop. Your Chapter 13 plan may modify creditor rights by restructuring debts (whether unsecured or secured) and the terms pursuant to which the debtor will pay off those debts. The Chapter 13 plan may “cure” defaults and reinstate mortgages and other debts, so as to save the debtor’s home, cars, etc. . So, if you have an asset that you want to keep (like your house or car) and can afford to pay going forward, but can’t afford to pay all of the past due amounts owing all at once, your Chapter 13 Plan payment can include a pro-rata payment to the creditor of the past due amount. In addition, a Chapter 13 plan may also “rewrite” some types of under secured debt by “stripping” the unsecured portion of the debt from the secured portion and splitting the debt into two claims: a secured claim in an amount equal to the present value of the collateral, and an unsecured claim for the deficiency. The plan “crams down” on the creditor’s “stripped” claim by making plan payments over the life of the plan totaling the present value of the secured portion of the claim (i.e., the value of the collateral). The unsecured portion of the claim is classified and paid, at pennies on the dollar, with other unsecured claims.
A chapter 13 debtor keeps possession of all assets (including their sole proprietorship business) and non-exempt assets through the course of the Chapter 13 Plan, whereas, such assets would have to be turned over to the trustee (and the business likely shut down) in a chapter 7 Bankruptcy.
One final benefit of Chapter 13 is the ability, through a confirmed Chapter 13 plan, to discharge debts that are not dischargeable in a Chapter 7 case. Such additional dischargeable debts include non-support marital dissolution obligations, criminal restitution payments, certain taxes, debts incurred to pay nondischargeable taxes and debts for willful and malicious property damage.
Of course filing for Chapter 13 Bankruptcy is very complex and the foregoing is only a super simple overview. For a more detailed explanation of how Chapter 13 Bankruptcy works go to http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter13.aspx or come in for an initial consultation.
Wm. Greg Bennett, Esq. is an attorney with over 20 years experience in private business and commercial real estate transactions and litigation. Mr. Bennett is a partner in the law firm of Bennett & Bennett, APC with his wife, Kelly Bennett, who practices family law, is a professional mediator and Mayor of Murrieta. Mr. Bennett is also a partner in Mediation Law Group, Inc. an alternative dispute resolution provider specializing in civil litigation and divorce mediation. Mr. Bennett can be reached by calling (951) 719-3456 or emailing him at gregbennett@bennettandbennettlaw.com“>gregbennett@bennettandbennettlaw.com.