Many people assume that if they do not pass the means test for Chapter 7 bankruptcy, then bankruptcy may not be appropriate. This is may not be true, however. Chapter 13 is a viable option for those who have regular income but face a distressing amount of debt.
The benefits of Chapter 13
As with Chapter 7 bankruptcy, Chapter 13 provides an “automatic stay” from most collection and
foreclosure proceedings. Creditors are not allowed to call the debtor or begin any legal proceedings to collect on the debt while he or she is under Chapter 13 protection. The stay allows the individual to organize his or her debts and finances and begin a controlled repayment of those debts.
A trustee who is appointed to handle the repayment program will evaluate the case and then collect money from the debtor, which is then distributed to the creditors. Consequently, the debtor can establish a habit of regular payments while avoiding being harassed by creditors. In some cases, the trustee is able to negotiate a reduction of interest and elimination of fees for the duration of the bankruptcy reorganization.
There are certain requirements that must be met in order to qualify for a Chapter 13 reorganization. If the debtor does not have a regular source of income or does not make a sufficient amount of income for the repayment of debt, the bankruptcy court may not approve the Chapter 13 filing. The purpose of Chapter 13 is to reorganize the way the household income is distributed so that certain debts are paid. If your income is not substantial enough for you to cover payments for primary debts, then you may not qualify for Chapter 13.
Therefore, in addition to income, the amount of debt a petitioner owes is also a consideration. As of January 2010, unsecured debt cannot exceed $336,900, and secured debt cannot exceed $1,010,650. Secured debts are those debts in which property or items of value are used as collateral to secure the debt, such as a mortgage or car note. Unsecured debts are those debts where no collateral was used to incur the debt, for instance, credit cards, subscription fees, memberships, medical debt and other service debt.
The repayment process
The court will draft a repayment plan for the debtor that will include payments to “priority creditors” as well as secured and unsecured creditors, in that order. “Priority creditors” are receivers of support payments and governmental authorities collecting taxes that may not be discharged. After payments to priority and secured creditors, the remaining plan payments will then be distributed to unsecured creditors. The monthly plan payment will depend on the debtor’s net income. Therefore, the Chapter 13 payment differs from debtor to debtor. The amount that unsecured creditors will receive can vary from 1% of the total amount owed to 100%. Any amounts owed to unsecured creditors that are not required to be paid through the plan will be discharged. It is important to note that even in a 100% plan the debtor still benefits, as any interest or penalty fees associated with the unsecured debt are done tolling as of the date of filing.
The plan payment can be altered if there is a dramatic reduction in or loss of income. The plan will then be adjusted to reflect this change in income. For severe cases, the judge may convert the Chapter 13 reorganization to Chapter 7 liquidation.
Many people who are unable to pay off their debts want to. Chapter 13 bankruptcy provides individuals with regular income a way to pay down their debts and achieve a fresh financial start. If you have issues with debt, contact an experienced bankruptcy attorney to discuss your options to reduce or eliminate it.