Bankruptcy: Chapter 13
Chapter 13 sounds scary. Is it?
Yes. Well, no. Okay a little. Yes, it takes longer. Yes, it costs more. But it also can provide much more relief than a chapter 7. A lot of people that I speak with tell me right away that they want to file for chapter 7. They had a friend who did it, or they saw someone on TV do it, or who knows what. Basically they want to file some paperwork and make all their debt go away. Unfortunately, it doesn’t quite work like that, and often there are some barriers to filing for chapter 7 such as wanting to keep a car or a house or making too much money or having too much stuff. Before making a decision to file, you need to know what chapter 13 is and why it might be a better option than chapter 7.
Chapter 13 bankruptcy is essentially a repayment plan. You enter into a repayment plan for some or all of your debt through a monthly amount. The plan lasts for 3 to 5 years. I know, I know, sounds like a long time. But again, the relief you can receive is substantial!
How can chapter 13 help?
When you file for bankruptcy, either chapter 7 or 13, usually the automatic stay goes into effect. This means that your creditors can no longer try to collect money from you. That is, the constant phone calls stop. The foreclosure process on your home stops. The repossession of your car stops (and if done soon enough often a repossessed car gets returned to you). The garnishments stop. The lawsuits stop. Everything just stops, and you have a chance to breathe.
During this break, you continue to make payments for ongoing expenses, such as food, utilities, and rent or mortgage payments as they come due, as well as that monthly bankruptcy payment. But it’s also during this break that the court, the trustee, and the creditors all get on the same page as to how your debt will be handled.
And this is the real beauty of the chapter 13! While in a chapter 7 you might lose your car, or the trustee might take your stuff and sell it to pay off your creditors, in chapter 13 none of that usually happens. Rather, the plan approved by the court generally lets you keep your stuff and the creditors have to abide by the plan. This is incredibly powerful and truly gives you the opportunity to rebuild and get a fresh start!
What debts get paid in chapter 13?
There are a number of debts that can be included in a chapter 13 plan. Some of the more common one are:
- Mortgage arrears
- Car note
- Child support arrears
- Federal and State Taxes
- Attorney fees for filing the bankruptcy
- Sometimes unsecured debt, but often it gets discharged instead of paid off
Bankruptcy cases have so many moving parts and pitfalls that, while not required, hiring an attorney is strongly advised. But how can someone already struggling with money come up with the funds to pay an attorney? Pay them through the plan! The bankruptcy laws allow the bankruptcy attorney to add their fees to the debt being repaid, so that you don’t have to come up with a lot of funds right away. This allows you to often put a relatively small amount down to file the case, and then pay off the rest through the monthly plan payment.
But there are other benefits to filing chapter 13. For instance, if you owe child support arrears, you can pay those through the plan. If you have a second mortgage or home equity line of credit on your home or rental property, you might be able to remove that debt from your home and treat it like unsecured debt.
Finally, with a few exceptions, the unsecured debt (credit card bills, medical bills, bank fees, etc.) will be either discharged or paid through the bankruptcy plan. This depends on a number of factors that require a close look at the particulars of your situation. But if the debt is discharged, that means you no longer owe it. It goes away. This can be a great relief to those struggling under crushing debt.