If you are considering filing Chapter 13 bankruptcy, it’s important to understand the costa and benefits of this type of filing. Prior to filing, your attorney will discuss both Chapter 7 bankruptcy and Chapter 13 bankruptcy with you. While both result in a discharge, the paths taken to get there are quite different. A Chapter 7 is a fast, clear-cut discharge of debt, while a Chapter 13 bankruptcy involves the confirmation of a plan and monthly plan payments. So why would someone choose a Chapter 13 over a Chapter 7?
Make Up Past Due Balances On Home and Vehicles
In a Chapter 7, if you’re behind on a home or vehicle, you can file bankruptcy but you have to surrender the property in the bankruptcy. Conversely, in a Chapter 13 bankruptcy, you can successfully file even if you’re behind on a vehicle or home, and you can use Chapter 13 to slowly catch up on the payments.
For example, if you are behind $10,000 on your home mortgage, your Chapter 13 bankruptcy will prevent your lender from foreclosing on the property. In exchange for this protection, you make a Chapter 13 payment each month consisting of your normal mortgage payment, plus a portion of the amount you were behind when you filed. Over the course of the 60 month repayment plan, you will slowly but surely get current on the mortgage. Essentially, this forces your lender to allow you a repayment plan for the amount you were behind. Your Chapter 13 bankruptcy payment schedule reflects this.
Manage And Pay Tax Debt
There are instances where old tax debt is discharged in a bankruptcy. This is true of both Chapter 7 and Chapter 13 bankruptcy, and generally relates to taxes which are more than three years old and which have been properly filed. For other tax debt, only a Chapter 13 filing puts you on track for being caught up with both the IRS and the NC Department of Revenue at the completion of your plan.
When you file your Chapter 13, the same tax debt which would be discharged in a Chapter 7 is also discharged in a Chapter 13. In addition, any other outstanding debt will be scheduled to be repaid in full over the course of the Chapter 13 repayment plan. This means that at the end of the Chapter 13, when you make your last payment, you will be current on your taxes.
Minimal Payments to Unsecured Creditors
Typically, your Chapter 13 bankruptcy payment plan will consist mainly of mortgage, vehicle, and other secured debt payments– quite often your unsecured creditors (credit cards, medical bills) are getting zero to 10% in the Chapter 13 plan. The reason for this is that the Chapter 13 plan payment has a feasibility component which drives how much money you have to pay to your unsecured creditors. As a result, you only have to commit your disposable income to your unsecured creditors. After taking into consideration monthly expenses and tax and mortgage obligations mentioned above, this often leaves very little for the unsecured creditors. So long as you commit the entirety of this disposable income to the unsecured creditors, your plan should be recommended for confirmation by the Chapter 13 trustee.
Lowered Balances On Secured Debt
Chapter 13 also allows you to lower the balance owed on property, so that it is equal to the fair market value of the property at the time of your Chapter 13 bankruptcy filing. This occurs mostly with vehicles. One requirement is you have owned the vehicle for more than 910 days, or roughly three years. If so, your Chapter 13 will lower the balance owed on the loan, and pay the loan off over the course of the Chapter 13 plan. This helps in two ways: first, you’ve stripped away debt in excess of the fair market value of the vehicle; second, you are spreading the remaining debt over the course of the 60 month repayment plan which effectively lowers your car payment and allows you to afford other necessities of life.
Speak With A Chapter 13 Bankruptcy Lawyer Today
If you have questions about a Chapter 13 bankruptcy, Chapter 13 bankruptcy plan payments, or any other aspects of Chapter 13 bankruptcy, please request a FREE CONSULTATION today, or call us at 704.749.7747. We will be happy to provide answers and help you determine your options.