Chapter 13 Bankruptcy

As you explore your bankruptcy relief options, you may wonder whether Chapter 13 could help you achieve your goals. Also known as the “wage-earner plan,” Chapter 13 bankruptcy allows the debtor to repay all or part of their debts in installments over a three- to five-year period. The experienced bankruptcy legal team at Ferguson Legal Group, LTD is prepared to help you assess your debt-relief options and move forward with the strategy that best suits your needs.

Benefits of Chapter 13 Bankruptcy Relief

There are several benefits to filing for Chapter 13 bankruptcy relief, such as:

  • You can retain your home or car in foreclosure/repossession
  • Temporarily suspends a foreclosure action against your home
  • You can make up any arrearage on your home or car over time (36-60 months)
  • You may be able to eliminate or reduce a second mortgage
  • You may be able to reschedule your secure debts and lower their payments, such as reducing your current payment on a vehicle.
  • You can protect any co-signer on your secured debts from any liability during the bankruptcy plan.
  • You can pay all or part of your attorney fee through the plan instead of all upfront.
  • If you qualify for a 0% plan, all your unsecured debts are erased
  • You may be able to substantially reduce the amount of unsecured debt you have to repay if you don’t qualify for a 0% plan.
  • Civil lawsuits or judgments against you are stopped and/or dismissed
  • Stops all wage garnishments and bank account attachments
  • Stops creditors from continuing to make harassing calls about your debts
  • You can repay student loans and/or tax debts via the 13 plan
  • You can even discharge reinstatement fees assessed by the BMV

Potential Drawbacks to Chapter 13

It’s important to understand the possible downsides of filing for Chapter 13 bankruptcy relief. For instance:

  • If you fail to make payments to your 13 plan, secured creditors can continue with a foreclosure or repossession of your property after requesting and receiving permission or “relief of stay” from the bankruptcy court
  • The bankruptcy remains on your credit report for 10 years
  • You cannot discharge most student loans, income tax liens, child support arrearage, or alimony obligations
  • You can only receive a Chapter 13 discharge once every 4 years
  • You may have to pay something to unsecured creditors if you have non-exempt equity in property or have income above the median standard.
  • You may have to give up all or part of your tax refund(s)
  • You may not use credit cards or incur any non-emergency debt of more than $1000 while in Chapter 13
  • You may not purchase anything on credit without obtaining written permission for the Chapter 13 Trustee
  • You may not dispose of any substantial property without written permission from the Chapter 13 Trustee
  • In most cases, your Chapter 13 payment will be automatically taken from your wages and paid to the Trustee through your employer

The Process for Filing a Chapter 13 Bankruptcy

People generally will look to Chapter 13 when they have a steady income but are not eligible for Chapter 7 for various reasons. Typically, Chapter 13 clients are either facing foreclosure or have filed Chapter 7 in the recent past, or they have large amounts of equity in specific property, and they want to retain that specific property.

The basic idea behind Chapter 13 is to develop an installment plan that will allow the debtor to retain their property while repaying their creditors according to the debtor’s available disposable income. A debtor’s disposable income (or what a debtor has to pay to secured and unsecured creditors) is determined through calculations of the debtor’s income and deductions via the “Means Test.”

For any secured property the debtor wishes to retain, the Chapter 13 plan will account for those payments, both currently due as well as any arrearage. For any secured property the debtor does not wish to retain, the debtor will have to surrender that property back to the creditor, and the debt will be converted to unsecured debt. Unsecured debts are typically accounted for in a Chapter 13 plan when the debtor has available disposable income as indicated on the Chapter 13 Means Test.

If a debtor’s Chapter 13 plan is a 0% plan, then your unsecured debts are wiped out and are not repaid to creditors. If the debtor’s plan is anything above a 0% plan, then your unsecured creditors will be paid your plan’s percentage on each unsecured creditor’s claim or debts. All creditors will have to file a “claim” to receive any payment. A claim is a bankruptcy form sent out to your creditors that they in turn complete and submit back to the court, and it is used as a means for verification of your debts.

Once you have filed your petition and plan, you will be assigned a Judge and Trustee and receive your 341 hearing date, which will be held 30-45 days from the date your petition was filed. The 341 hearing is a meeting for the creditors and the trustee to ask you questions about your petition and plan, as well as assets and liabilities. You are under oath when you are attending this hearing. A typical hearing lasts 10 minutes. If your petition and plan have been properly prepared and filed, the 341 hearing should be the only hearing you have to attend. If there are any corrections or amendments to your plan, the 341 hearing is when they will be addressed.

Here to Support You Every Step of the Way

If your plan has not been objected to by the Trustee or any interested party within a certain time period, your plan will automatically be approved, and there will not be another hearing required. Once approved, you will have to continue making the plan payments to complete the plan and receive a bankruptcy discharge order. Without the order, you may still have liability for the debts listed in your petition.

In some Chapter 13 Plans, the Trustee will require you to turn over your non-exempt federal and state refunds during the life of your plan. On average, those with larger refunds (approximately $3000 or more) are prone to have the Trustee request your refunds. Typically, if you are required to turn over those refunds, this additional money will be considered an extra contribution toward your unsecured creditors and not credited as extra regular scheduled payments. In other words, a windfall to your unsecured creditors, as they will receive more money, and you will not be reducing the length of time in your plan. However, as with most things, there are ways to avoid surrendering the refunds if you happen to fall into this category.

Upon discharge, you will receive an “order” so deeming that you have completed your plan payments and that your debts have been discharged and/or paid per the provisions in the Chapter 13 plan. Your creditors are forbidden to demand collection from you for discharged debts.

As you explore your bankruptcy options, we invite you to reach out to the dedicated team at Ferguson Legal Group, LTD, to discuss your situation. Together, we can determine the most strategic and successful path forward.

Schedule your initial consultation today.