How Chapter 13 Bankruptcy Can Help

July 11, 2012

Chapter 13 is known by several different names: reorganization plan, wage earner’s plan, and repayment plan. Whatever the name, filing a Chapter 13 bankruptcy indicates an intention to repay creditors over three to five years. The debtor makes a monthly payment to a bankruptcy trustee, who in turn pays the creditors.

Save your home
Many debtors file Chapter 13 to stop the home foreclosure process. The moment the bankruptcy is filed a foreclosure action must stop. The debtor is given an opportunity to propose a plan to pay the delinquent mortgage payments over three to five years. During this repayment period the debtor must also pay any mortgage payments due after the bankruptcy is filed (called post-petition payments). Failure to make post-petition payments can result in losing the bankruptcy protection and the bank may resume the foreclosure action.

Cram-down
The Chapter 13 debtor can ask the bankruptcy court to modify and reduce a secured loan to the value of the security. This process, commonly called a “cram-down,” is done when the amount of the secured loan is significantly more than the value of the property. The resulting benefit is a lower monthly payment.

For example, say the debtor owes $20,000 on a car loan, but the car is worth only $10,000. The loan can be “crammed-down” to an allowed secured debt in the amount of $10,000 only. The debtor pays only the $10,000 during the Chapter 13 bankruptcy and the remaining unsecured portion is discharged at the end of the case. Every situation is different, so be sure to discuss your options with your bankruptcy attorney.

Repayment of non-dischargeable obligations
Sometimes a Chapter 13 is used to repay debts that cannot be otherwise discharged. Tax debt and child support debts are two common debts that get paid under the supervision of the bankruptcy courts.

What you expect during a Chapter 13 bankruptcy
Once the debtor files a bankruptcy, the bankruptcy court automatically issues an injunction prohibiting creditors from collecting from the debtor. This “automatic stay” also stops foreclosure, lawsuits, and garnishments. Within 15 days of the filing the debtor must file a proposed repayment plan with the court. The plan is sent to the U.S. trustee and to all creditors for review. The plan must provide for regular fixed payments to the trustee who then distributes the funds to creditors according to the terms of the plan (which may be less than full payment on their claims). It is common for a chapter 13 plan to propose to pay secured creditors in full and nothing to unsecured creditors. This largely depends on whether there is “extra” money at the end of the month after the debtor’s secured creditors and monthly expenses are paid.

If you need assistance from the federal bankruptcy laws, contact an experienced bankruptcy attorney to review your options. The bankruptcy code offers powerful relief to deserving people in bad financial situations.
 

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