A Chapter 13 bankruptcy is a reorganization plan where an individual pays a Chapter 13 trustee a set amount of money for a period of at least three to five years. A Chapter 13 faces the same three major issues that are involved in a Chapter 7. The Bankruptcy Court is concerned with a person’s income, assets and liabilities. However, how these issues are dealt with is dramatically different in a Chapter 13.
In a Chapter 13, a reorganization plan is created that deals with these issues. This Plan accounts for the persons income in determining how much a person can afford to pay into the Plan. A person’s assets are also significant because a person who would have had a non-exempt asset, like a boat, seized and sold in Chapter 7 is able to keep that asset but must pay into the Plan the value of that asset. The Chapter 13 Plan also deals with the person’s liabilities and how much is paid to each liability through the Plan. How each of these issues is dealt with in a Chapter 13 Plan is important.
Income in a Chapter 13 is viewed from two angles. First, the Bankruptcy Court is concerned with whether or not the Chapter 13 Plan filed with the Court is feasible. This means that the person must be able to afford to pay the Plan payment each month. If a Plan requires that a person pay $1,000.00 a month but that person can only afford $500.00, the Court will find that the Plan is not feasible and it will not be confirmed.
Second, the Plan must pay all of the person’s disposable income into the Plan. If the Plan proposes to pay $500.00 a month into the Plan, but the person can afford to pay $1,000.00 the Court will require that all of the person’s disposable income be paid into the Plan.
A person’s assets are divided into two categories exempt assets and non-exempt assets. Exempt assets are protected up to a certain point and include things that most people use on a daily basis like clothing, furniture or a car. Non-exempt assets are not protected. These types of assets include things like boats, motorcycles, stocks, bonds or comic book collections.
Unlike a Chapter 7 where a non-exempt asset is seized by the Trustee and sold, a person in a Chapter 13 can keep the non-exempt asset. However, they must pay into the Plan the value of that asset. If you owned a boat free and clear and it was worth $10,000.00, in a Chapter 7 it would be seized and sold and split up amongst your creditors. However, in a Chapter 13 you have a choice of paying $10,000.00 into the Plan to keep the asset.
A Chapter 13 also deals with a person’s liabilities in a dramatically different than a Chapter 7. In a Chapter 13the reorganization plan splits your debts into different categories and deals with them in different ways. Secured debts like a car are paid in full under the Plan. The person no longer makes a car payment and only pays the Chapter 13 Plan payment each month. The Plan also pays any back taxes or child support that a person might owe.
Unsecured debts are paid a certain percentage based upon the amount of disposable income an individual has left over each month and whether they have a non-exempt asset they wish to keep. At the end of the Plan if the unsecured creditors only received 10% of what they were owed, the rest is eliminated or discharged in the Chapter 13 Bankruptcy.
A Chapter 13 also allows someone who is behind on their mortgage payments to come current and not lose their house to foreclosure. The payments they are behind are placed into the Plan and paid over the life of the Plan. As long as the Plan is completed and the person continues to make their regular plan payments the house cannot be foreclosed on.
However, in the current financial climate where most people are upside down on their house and no longer have the equity they once did a Chapter 13 offers another important option for someone who might have more than one mortgage on their home. If the home is worth less than the first mortgage a Chapter 13 offers the opportunity to “cram down” or strip off the second mortgage in Bankruptcy Court. If the person completes their Chapter 13 Plan then the second mortgage is considered discharged or eliminated.
Chapter 13 bankruptcies are complicated and can often be trying for people because they no longer have discretionary income.
However, they also represent a huge opportunity for some people to pay off taxes, child support, or eliminate large amounts of debt that would not be possible normally.