Chapter 13 bankruptcy is referred to as a "reorganization" bankruptcy. For bankruptcy for businesses, reorganization is accomplished in Chapter 11 bankruptcies, which is a separate Chapter under the Bankruptcy Code designated for businesses and persons of higher net worth. There are limitations to the amount of debt one may have in order to file a Chapter 13, but most individuals qualify. A Chapter 13 bankruptcy essentially involves making a monthly Chapter 13 Plan payment to the Trustee for 3 to 5 years. The Trustee makes payments to creditors from those Plan payments, for both secured and unsecured creditors. However, the amount paid to unsecured creditors in a Chapter 13 bankruptcy often amounts to pennies on the dollar.
Chapter 13 bankruptcy is an attractive option to many Debtors, because it allows a fair amount of flexibility to those who are self-employed or who otherwise do not have a salary-based income. The downside to filing a Chapter 13 bankruptcy is the time commitment, which is 3 to 5 years. Also, if the Debtor's income increases during their Chapter 13 term, the Trustee will require the increase to be made to creditors in most cases.
There are several advantages to filing a Chapter 13 bankruptcy, which include:
A mortgage which is not connected to any value in a property can be treated as an unsecured debt, allowing the Debtor to pay only a few pennies on the dollar. This often occurs where the amount owed to the first mortgage is $150,000, and the property is now only worth $125,000. A second mortgage of any amount would be treated as an unsecured debt in a Chapter 13, meaning the second mortgage would be voided, and the Debtors do not continue paying on it. The monthly Plan payment to the Trustee will give that second mortgage creditor only a few pennies on the dollar, and the Court will enter an order voiding that lien against the property.
If a vehicle has been owned for at least 2 ½ years by the Debtor, it can be paid for based on what it is worth (the fair market value), rather than what is still owed to the lien holder. This vehicle can also be paid through the Plan, rather than with a separate payment to the lien holder.
The legal fees are manageable, because at least half of the legal fee is paid through the monthly Plan payment after filing, making the case more affordable before filing. Read the common myths of bankruptcy in Mesa.
Chapter 13 bankruptcy is a very involved process, with each case having a different Plan prepared according to the Debtor's income and expenses. Our Tempe bankruptcy law firm has significant and long-term experience in dealing with Chapter 13 bankruptcy cases, including knowing the requirements of the current Chapter 13 trustees in Phoenix and Tucson. Speak to our Mesa bankruptcy lawyer today.
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