Whether to file Chapter 13 is an important decision, and one that is best made alongside a well-experienced bankruptcy attorney who understands all the nuances of the Bankruptcy Code and the case law relevant to a particular state. Chapter 13 can have positive impacts to you financially, allowing you and your family a clean, fresh start and a less stressful financial future; however, if your current and past financial history is not considered carefully, Chapter 13 can be a long and negative experience. At ARlaw Partners, we will work through your information prior to filing in order to make sure that you have all the information needed to make the best decision for you and yours.

Did you know that there are several different types of bankruptcy? Contrary to common belief, there are actually many different options to choose when considering bankruptcy. The two most common types of consumer bankruptcy are Chapter 7 Bankruptcy and Chapter 13 Bankruptcy. While they are both part of the United States bankruptcy code, they are very different processes that achieve the goals of debt relief and credit repair in very different ways.

In this blog, we will discuss what a Chapter 13 bankruptcy is and under what circumstances a person should file Chapter 13 bankruptcy or consider filing Chapter 13 bankruptcy.

What is Chapter 13 Bankruptcy?

There are several key differences between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy. It is important to know how each chapter works so that you will know which one you need to file. Bankruptcy rules and procedures vary, so, depending on the circumstances of your household, it is important to know how a specific bankruptcy will affect you and which one may benefit you most.

As discussed in our earlier blog on Chapter 7, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA), adopted by Congress in 2005, made significant changes to the U.S. Bankruptcy Code. Among other provisions, it made it possible for a person, or married couple, to file a Chapter 13 if they do not qualify for a Chapter 7. To read our blog on Chapter 7, please follow this link: Should I File Chapter 7 Bankruptcy for Relief in Arkansas? – ARlaw Partners

So, what is Chapter 13 Bankruptcy?

Filing for financial relief under Chapter 13 of the U.S. Bankruptcy Code essentially reorganizes and consolidates some debts for repayment over a period of three (3) to five (5) years. Payments toward a home mortgage, vehicles, leases, taxes, and other debts may consolidated into one monthly payment. Attorney’s fees may also be included in the monthly payment making the costs to be paid up front reduced to only the court’s filing fee and required credit counseling courses.

Ok, but what does Chapter 13 Bankruptcy practically do?

Essentially, Chapter 13 typically rolls all of a person’s debts into one monthly payment that the person makes to the Chapter 13 Trustee. This lump sum payment is called the “Plan Payment.” The Trustee then takes this lump sum, consolidated monthly debt payment and breaks it up into pieces that are distributed to the person’s creditors according to the Plan negotiated by your attorney after the case is filed. This amount covers everything from a person’s mortgage, car loans, taxes owed, medical bills, credit cards, etc. Chapter 13 is basically reorganizing all of a person’s debt into one monthly payment.

At ARlaw Partners, we often file Chapter 13 bankruptcy for $0.00 down. With appropriate motions filed with the Court, we can even set the Court’s filing fee on a payment plan to be paid out in time. This enables us to file bankruptcy for no money down.

Do I have to pay all of my debt in a Chapter 13?

Like most legal questions, the answer is that old reliable standby – “it depends.” Long term debts on land that will run for more than five years may be paid at the same rate/term that they are at the time the case is filed. Arrearages on financed purchases can be spread out over the Plan. Vehicles or other personal property that is financed are essentially refinanced by the plan, often at far more favorable interest rates. Furthermore, depending on the facts of the case, attorneys can often reduce the principal amount owed on financed property like cars tto the fair market value of the car, rather than the amount owed on the car.

Taxes must be paid in full in the Plan, but penalties and interest on taxes do not. Child support arrearages must be paid in full through the Chapter 13 bankruptcy Plan. Non-priority, unsecured debt such as medical bills, credit card bills, and unsecured personal loans do not have to be paid in full through a Chapter 13 bankruptcy Plan. Medical bills, credit card bills, etc. are paid an amount that the person filing can afford at 0% interest based on a budget that the person filing and her/his/their attorney put together.

How is the amount of a Chapter 13 Plan payment figured?

Individuals or married couples who seek reorganization of their debts under Chapter 13 propose a Plan to the Bankruptcy Court. As previously mentioned, payments are made in monthly installments to a Trustee assigned to the specific case. Determining the amount of the monthly payment depends on several factors:

First, a reorganized Chapter 13 payment consists of car payments, mortgage payments, and other financed property necessary for reorganization. Second, disposable income (the amount of money remaining in a person’s monthly budget once reasonable expenses are deducted from their income) is taken into consideration. Oftentimes, this amount is zero. However, if a person makes a lot more than they spend in a month on living expenses, the extra money will have to be paid into the Plan to pay down other debts (like credit card, personal loans, medical debt, etc.) Third, the value of any assets not exempted under the Bankruptcy Code will need to be paid into the Plan.

Will I lose any of my property in a Chapter 13 Bankruptcy?

The third factor above is a little confusing. The Bankruptcy Code states that creditors have to get at least the value of what they would get in a Chapter 7 bankruptcy in a Chapter 13. Exempt Property is a function of the Bankruptcy Code that allows your attorney to keep the Chapter 7 Trustee from taking your property and selling it to cover your debts. In a Chapter 13, the law does not allow the Trustee to take any property and sell it unless the person filing wants to surrender the property. So, instead of losing unexempt property, the person filing just has to pay the value of the unexempt property into the Plan over the Plan’s life.

For example, if you have a car that is worth $35,000.00 and $25,000.00 of it can be exempt, but $10,000.00 is not, then $10,000.00 would need to be paid into the Plan over the life of the Plan (three to five years). If the Plan is scheduled for five years, then $167.00 would be added to the payment each month to total $10,000.00 over the five-year period.

At ARlaw Partners, we check over all of your property and provide you with legal analysis of what property is exempt and what is not before we file anything to insure that you do not have any surprises once you file.

As you can tell by this very basic blog, Chapter 13 is a broad and complicated subject. However, ARlaw Partners has multiple attorneys very well versed on the subject with many, many successful Chapter 13 cases under their belts. If you would like a free consultation with an experienced attorney about your particular situation, click the “Contact Us” link below to schedule your free consult. Or, feel free to call one of our offices at the numbers below.

Whether to file Chapter 13 is an important decision, and one that is best made alongside a well-experienced bankruptcy attorney who understands all the nuances of the Bankruptcy Code and the case law relevant to a particular state. Chapter 13 can have positive impacts to you financially, allowing you and your family a clean, fresh start and a less stressful financial future; however, if your current and past financial history is not considered carefully, Chapter 13 can be a long and negative experience. At ARlaw Partners, we will work through your information prior to filing in order to make sure that you have all the information needed to make the best decision for you and yours.