Chapter 13 Bankruptcy
Chapter 13 bankruptcy is usually used by individuals, married couples and some small businesses (no corporations or partnerships) who have regular income and are ineligible to file Chapter 7 bankruptcy, or have significant non-exempt assets they want to keep. Under a Chapter 13 bankruptcy, you are given three to five years to complete a repayment plan. In addition to wiping out all dischargeable debt at the successful completion of the plan, debtors can use this repayment period to cure arrears on their home mortgages, car payments and taxes.
Chapter 13 bankruptcy is not available if your secured debts exceed $1,010,650, and/or your unsecured debts are more than $336,900. A “secured debt” is one that gives a creditor the right to take a specific item of property if you don’t pay the debt, such as a home loan or auto loan. An “unsecured debt” (such as credit card and medical bills) does not give the creditor this right.
The Repayment Plan
The repayment plan filed in a Chapter 13 is based on the complex formulas of the means test (also used to determine eligibility for Chapter 7 bankruptcy). Your plan must be proposed in “good faith” meet the following requirements:
- Any “priority debts” such as child support and alimony, wages you owe to employees, and certain tax obligations must be paid in full over the course of your plan.
- You must make regular payments on any secured debts you plan to keep, such as your mortgage and car loan. Any arrears, the amount by which you have fallen behind on such payments, must also be repaid over the course of the plan.
If, according to the means test and other IRS schedules, you have any disposable income left over after meeting these two requirements, that amount will go towards paying off your unsecured debt, such as credit card and medical bills. These debts do not need to be paid in full, they merely get what is left over after the priority debts and secured debts.
What Debts Are Dischargeable in Chapter 13?
The following debts are wiped out after a Chapter 13 bankruptcy discharge:
- Personal loans
- Credit cards
- Repossession deficiencies (i.e. the amount you owe on your car after a repossession)
- Auto accident claims against you, except for claims resulting from driving while intoxicated
- Medical bills
- Many Judgments
- Business debts
- Negligence claims
- Tax penalties over 3 years old where a return was filed
- Certain property orders resulting from a divorce proceeding (not alimony or child support)
What Debts Are NOT Dischargeable Under Chapter 13?
The following debts are not wiped out following a Chapter 13 bankruptcy discharge:
- Debts incurred by fraud or false pretenses;
- Debts incurred by a false statement in writing (such as false credit application);
- Debts incurred by embezzlement or larceny;
- Spousal support or child support obligations;
- Debts incurred by willful and malicious injury;
- Debts resulting from death or personal injury by debtor operating a motor vehicle while intoxicated;
- Criminal fines and restitution;
- Income taxes for tax years less than 3 years ago and other “priority taxes” (i.e. taxes first due within three years of the bankruptcy filing and taxes assessed within 240 days of the bankruptcy, or which are unassessed but assessable when the case is filed, are priority claims which are not subject to discharge.);
- Fines and penalties owed to a governmental unit;
- Student Loans
Benefits of Chapter 13
While Chapter 7 is the most used and preferred form of bankruptcy, there are some cases where filing a Chapter 13 bankruptcy makes more sense.
Today’s tough economic times have resulted in falling home values, leaving many people owing more on their home then it is worth (also called being “underwater” ). If you have a second mortgage, home equity line or third mortgage on your home (“junior liens”), those loans may be stripped off or crammed down in a Chapter 13 bankruptcy.
In order to strip off a second mortgage or home equity line of credit (“HELOC”), the value of your house must be less than what you owe on the primary, or first, mortgage. If this is the case, under a Chapter 13 bankruptcy you will be able to wipe out the second mortgage or HELOC and use the 3 to 5 year repayment period to pay your primary mortgage and any arrears on the primary mortgage.
Lien stripping is not available under Chapter 7 bankruptcy.
Cure Mortgage Arrears/Back Taxes/Child Support
Chapter 13 bankruptcy is often the best choice for personal bankruptcy when a person or married couple owes money on their mortgage, back taxes or domestic support order and needs time to get current on those debts. Since primary mortgage arrears, back taxes and child support obligations are not wiped out by any bankruptcy, Chapter 13 can give you a chance to get caught up on those payments.
Sometimes a person qualifies for a Chapter 7 bankruptcy, but has a significant amount of non-exempt assets, such as a house with more than $60,000 worth of equity or large amounts of jewelry, that they would not be able to keep under a Chapter 7. In these cases, Chapter 13 is a better option because you can keep all of your assets under a Chapter 13 bankruptcy.
Divorce Settlement Obligations
While child support obligations and alimony cannot be wiped out by any bankruptcy, other divorce settlement obligations not related to support, such as property division orders, can be discharged in a Chapter 13 bankruptcy. The distinction between support orders and property settlement is important and competent legal advice is necessary to determine if a divorce obligation fits this exception. Wink & Wink, P.C. can help you determine if this fits your situation.
I f you have any other questions, contact Wink & Wink, P.C. today for a Free Consultation. We can help you eliminate your debt and gain a fresh start.