Chapter 13 Bankruptcy

Chapter 13: Who Wants To File; Who Must File

People file bankruptcy to wipe out their debts and rebuild their financial lives without having to pay their creditors. In Chapter 13, debtors repay their creditors an amount between a small fraction of and up to all of what they owe through a three to five year plan. So who would want to elect for a Chapter 13 repayment plan over a Chapter 7 discharge?

One group of debtors benefits from filing a Chapter 13, because it allows you to:

  • keep all of your property including assets a bankruptcy trustee could liquidate in a Chapter 7;
  • catch up on missed mortgage or car payments and force a repayment plan on your lender;
  • pay off nondischargeable debts such as recent tax obligations;
  • reduce your car loan balance through a “cramdown”, where you reduce the amount owed and the interest rate; an
  • eliminate unsecured second mortgages (or other junior liens) from your house through “lien stripping.”

The other group of debtors do not choose to file a Chapter 13; they are forced to do so, because they do not qualify for a Chapter 7. In 2005, Congress changed bankruptcy law due to lobbying from the banking industry. Banks pressured Congress to make it harder to file a Chapter 7 if your income exceeded certain levels. The new law in 2005 instituted the “Means Test.”

In most cases, debtors have to go through the Means Test. It calculates your household income during the period of time six months before you file. If your income exceeds the median for the state where you live, your disposable income will be reviewed. Under the review, a complicated formula is applied to determine whether you have to file a Chapter 13 and how long the Plan will last. For example, a family of three in Maryland earning $100,000 will have to go through the Means Test review and may, or may not, need to file a Chapter 13 depending on the family’s specific circumstances.

Typically, a Chapter 13 bankruptcy plan includes mortgage and/or auto loan arrears (the amounts you could not pay), taxes that are not discharged, and a small percentage of unsecured debts such as credit cards, personal loans, medical bills, old repossessions, and old foreclosures. Your attorney will craft a monthly payment you can pay. You will make this payment each month to the bankruptcy trustee, who will then distribute the money to your creditors based on federal law.

Debts Chapter 13 Cannot Discharge

Just as in a Chapter 7, Chapter 13 cannot discharge and wipe out certain debts. These include student loans, most taxes, alimony, and child support. In most Chapter 13 cases, however, you will pay back taxes, alimony and child support you owe over the course of the Plan. In some cases, student loans can be given preferential treatment and be paid before other unsecured debts.

How a Chapter 13 Bankruptcy Affects Your Creditors

Once we file your Chapter 13, most of your creditors cannot call and harass you. The law requires them to call our office. Once we give our permission, you will be able to contact the creditors you make direct payments to outside the Plan, such as your mortgage company or your car lender.

The Fresh Start at the End of the Chapter 13 Journey

Once you complete your Plan by making all payments and complying with the Chapter 13 requirements, you will be awarded a Discharge. Similar to Chapter 7, the discharge means you are no longer responsible for any outstanding balances. The exceptions are a mortgage and car loans, student loans (if not paid off), and on-going alimony and child support. You have reached the end of a long journey and can now enjoy a fresh financial future.

As complicated and confusing as Chapter 13 can be, for many people it offers the best path to a fresh start. Contact us for your FREE consultation to learn whether you qualify and how you can best wipe out your debts and rebuild your life. To learn even more about Chapter 13, click here see our Bankruptcy FAQs.