Chapter 13 bankruptcy is referred to as a “reorganization” bankruptcy. For businesses, these are known as 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 3-5 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 3-5 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.
Advantages to Filing Chapter 13 Bankruptcy
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. For example, if the amount owed to the first mortgage is $150,000, and the property is now only worth $125,000, a second mortgage (or HELOC) of any amount would be treated as an unsecured debt in a Chapter 13. The Court can enter an order voiding the second mortgage lien, and you stop paying on it. The monthly Plan payment to the Trustee will give that second mortgage creditor (along with other unsecured creditors, like credit cards) only a few pennies on the dollar, and the Court will enter an order voiding that lien against the property. This can only happen in a Chapter 13 (not available in Chapter 7), and you must complete the Plan payment obligations for the lien to be stripped.
If a vehicle has been owned for at least 2½ 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, and often at a lower interest rate than the loan currently has.
The legal fees are manageable, because a portion of the legal fee can be paid through the monthly Plan payment after filing, making the case more affordable before filing.
If you have assets that are not exempt (and would be taken away in Chapter 7), you can keep them in a Chapter 13. The rule is, you must treat the creditors better in the 13 than they would be treated in a 7. So you can keep your business, your boat, extra car, etc… if you are willing and able to pay for that value in your 3-5 year plan. And you don’t have to guess what your plan payment will be; we calculate that before you file the case.