Chapter 13 bankruptcy is a three- to five-year payment plan that compels you to pay a portion of your debt while allowing the rest to be discharged.
People who earn too much money to qualify for Chapter 7 bankruptcy file Chapter 13, but people with lower income can also file Chapter 13. The amount you must pay is determined by your income, assets, and debt. Certain taxes, arrears on secured loans (such as a mortgage or auto loan), and arrears on domestic support responsibilities must all be paid in full. While Chapter 13 has the advantage of allowing you to safeguard your assets from liquidation, you must pay creditors at least the value of your unprotected (“non-exempt”) assets. And, depending on your “disposable income,” which the law calculates using a mathematical formula, you may have to pay creditors more than this.
Benefits that are not accessible in Chapter 7 bankruptcy may be available in Chapter 13. In some cases, it can help homeowners remove a second mortgage from their house permanently, lower the interest rate on a car loan, reduce the total owing on a car loan, and lower the amount of a tax lien. Your non-exempt property may be protected from liquidation if you file for Chapter 13 bankruptcy. In addition, it can prevent foreclosure or repossession by allowing you to make up missed payments (arrears) on secured debt over a three to five-year period.
WHAT KIND OF PEOPLE ARE QUALIFIED FOR CHAPTER 13 BANKRUPTCY?
In general, Chapter 7 bankruptcy is more restrictive because it requires you to pass the “means test.” Even if you qualify for Chapter 7, you can still file for Chapter 13. However, there are some limitations to Chapter 13 bankruptcy eligibility. To begin, you must be a person or two individuals filing jointly. Corporations and limited liability companies (LLCs) are not eligible for Chapter 13 bankruptcy. Second, you must have a steady source of income, such as social security or a pension. Third, when you file for bankruptcy, your total unsecured debt cannot exceed $465,275, and your secured debt cannot exceed $1,395,850. These loan restrictions are changed on a regular basis and are especially important for small business owners who have a lot of debt.
Chapter 13 bankruptcy Attorney Loomis and Greene can assist you in determining whether you qualify for it.
IN A CHAPTER 13, HOW MUCH WILL I HAVE TO PAY?
You will be required to make payments to the bankruptcy trustee for three to five years if you file for Chapter 13 bankruptcy. Your contributions will be distributed by the Trustee in accordance with the conditions of your Chapter 13 plan. Your Chapter 13 plan payment amount is determined by your income, assets, and debts. Your Chapter 13 plan must at a minimum address certain type of debts, such as certain taxes, secured debt arrears, and domestic support obligations. Income tax liabilities for returns due in the last three years must be paid through your Chapter 13 plan, but responsibility for returns due more than three years ago is unlikely to be paid. Sales taxes and payroll taxes must be paid through your Chapter 13 plan if you are personally liable.
Furthermore, if you are behind on a secured obligation, such as a car loan or a mortgage, and you want to maintain the collateral (car, house) you must pay the arrears (the amount you owe on the loan as of the day you file bankruptcy) through your Chapter 13 plan. If it involves resolving arrears on a secured loan, you must also make timely payments on the secured debt. These payments do not have to be made through your Chapter 13 plan and can usually be made directly to the creditor.
If you owe child support, alimony, or maintenance when you file bankruptcy, you will almost certainly have to pay these debts through your Chapter 13 repayment plan. Furthermore, you must continue to make all domestic support payments that are due during your bankruptcy. Domestic support obligations that become due after you file bankruptcy are usually paid directly to the receiver of the obligation rather than through your Chapter 13 plan.
Other debts, such as unsecured debt (credit cards, medical bills, and personal loans), may or may not be discharged in a Chapter 13 bankruptcy. Your assets and income, on the other hand, may be used as a foundation for you to be required to repay some of your debt in Chapter 13 bankruptcy. Your creditors cannot fare worse in a Chapter 13 bankruptcy than they would in a Chapter 7 bankruptcy, according to the law. This means that Chapter 13 integrates the asset analysis of Chapter 7, in which the law defines a certain property that you can keep (“exempt”). If you have “non-exempt” property, you must pay the value of that property to your creditors in Chapter 13 bankruptcy.
If your salary is too high, you may have to pay even more to your creditors. If your household income for the six months before to filing (current monthly income) is more than the Colorado median income for your household size, the amount you must pay in Chapter 13 bankruptcy will most likely be determined by the complicated calculation of the long-form “means test” (also used to determine eligibility for Chapter 7 bankruptcy). The method begins with your typical monthly household income and allows you to subtract a variety of expenses from that income, including:
Food, clothing, utilities, and education are all examples of living expenses.
Expenses for children under the age of 18; ongoing medical expenses;
Taxes, health insurance, term life insurance, and retirement contributions; Secured debt payments for your home and vehicle; Other reasonable and necessary expenses for the support of you and your dependents (ex., business expenses); and Those expenses mentioned above that must be paid in Chapter 13 bankruptcy.
Some expense deductions are based on IRS household size guidelines, while others are dependent on the amount you actually spend. In general, if your income minus these authorized expenses results in a positive number, you have “disposable income,” which you will pay to your unsecured creditors in your chapter 13 bankruptcy plan over the course of five years.
Finally, any debts secured by collateral that you plan to keep, such as your mortgage and auto loan, require regular payments. While these payments can be made directly to the creditor outside of your Chapter 13 plan, they are usually mentioned in the plan and are required as a condition of receiving a bankruptcy discharge at the end. Alternatively, you might use a Chapter 13 plan to pay off a secured loan at a reduced interest rate.
Developing the most advantageous Chapter 13 repayment plan for you, in general, necessitates legal counsel. Chapter 13 bankruptcy is a difficult and combative process. In a Chapter 13 bankruptcy, Loomis and Greene has the experience, knowledge, and skill to assist you receive the lowest payment feasible.
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WHAT FACTORS DECIDE WHETHER I’M ELIGIBLE FOR A THREE-YEAR OR FIVE-YEAR CHAPTER 13 REPAYMENT PLAN?
In most cases, bankruptcy law mandates you to pay into a Chapter 13 plan for three to five years. Unless you are repaying all of your debt in bankruptcy, you must be in a five-year Chapter 13 plan if your household income for the six months preceding to filing (your Current Monthly Income) is over the median income for your household size in Colorado. You can choose a plan term between three and five years if your household income for the six months before to filing was less than the median income for your household size in Colorado.
Loomis and Greene can assist you figure out if you qualify for a three-year Chapter 13 plan or if you need to stay in Chapter 13 for five years.
WHAT ARE SOME OF THE ADVANTAGES OF CHAPTER 13?
While Chapter 7 bankruptcy is the most common and favored option, Chapter 13 bankruptcy offers a number of advantages that Chapter 7 bankruptcy does not.
The following are some of the advantages of filing for Chapter 13 bankruptcy:
Lien Strip (Remove a Second Mortgage From Your Real Estate Permanently): If the value of your home is less than the amount owed on your first mortgage, and you have a second, home equity line, or third mortgage on it (“junior liens”), the junior liens may be permanently eliminated in a Chapter 13 bankruptcy. Lien stripping is a process that is conducted through a separate motion in your Chapter 13 bankruptcy.
Reduce Your Secured Debt’s Interest Rate: In Chapter 13 bankruptcy, you can repay a secured debt throughout the course of your three to five-year repayment plan. On secured loan, you must pay interest at a rate that combines the risk factor and the prime rate. Because the prime rate has been unusually low for the previous ten years, Colorado’s prime rate is typically 4.5%. If you have a high-interest debt that is secured by collateral that you want to maintain (for example, a car), paying it off through your Chapter 13 plan can save you money.
Cram Down (Reducing Your Secured Loan Balance): While you can pay off a secured loan through your Chapter 13 plan at a low-interest rate, you can also lower the amount owed on the secured loan in certain conditions. In particular, you can use your Chapter 13 plan to decrease the total owed on a secured loan to the value of the collateral and pay it off with low interest. This is referred to as crowding down the loan balance, and it can only be done if the collateral is worth less than the secured loan balance outstanding. Because the collateral in these loans is generally worth significantly less than the balance owed, cram downs can be highly advantageous for loans secured with household goods (ex., Conn’s, Rent-a-Center). Cram downs are also useful for reducing the amount owing on a car loan. However, there are several limitations to paying down an auto loan balance. You can only cram down the balance on a vehicle loan if you’ve had it for at least 2 12 years (910 days) before filing bankruptcy unless the loan was not a purchase money loan (ex., you took out a loan against the car after you already owned it free and clear) or you bought it for business or for someone else’s use. When you file bankruptcy, you can cram down the balance owed on the vehicle to what it’s worth and pay that balance at a low-interest rate through your chapter 13 bankruptcy payment plan.
Cure Mortgage Arrears/Back Taxes/Child Support: You can cure (catch up) on your mortgage payments, back taxes, or child support obligations during your three to five-year Chapter 13 plan. This is especially beneficial for folks who are facing foreclosure. In most cases, partial payments are not accepted by the mortgage lender when your home is in foreclosure. This forces you to make up all of your missed payments at once in order to avoid foreclosure. Chapter 13 can assist persons who are in this hopeless predicament. It will prevent foreclosure, allow you to repay your debts through a three- to five-year Chapter plan, and require the lender to accept regular payments once more. You must, however, make regular payments on the loan as they become due after you enter bankruptcy as a condition of this.
Assets that are not exempt: A person may qualify for Chapter 7 bankruptcy but have a considerable amount of non-exempt assets, such as a home worth more than $250,000, which they would not be permitted to maintain in Chapter 7. Because Trustees in Chapter 13 bankruptcy do not sell property, it may be a preferable option in these situations. Rather, under Chapter 13 bankruptcy, you pay to keep your non-exempt assets. Spreading the cost of your non-exempt assets across a three- to five-year Chapter 13 plan can make it more affordable to keep your home.
While child support and alimony payments are unaffected by bankruptcy, other divorce settlement obligations that aren’t connected to support, such as property division decrees, can be dismissed in a Chapter 13 bankruptcy. When assessing whether an obligation from a divorce decree or separation agreement is dischargeable in Chapter 13, the distinction between support orders and property settlement is crucial.
To take advantage of these benefits, our Chapter 13 bankruptcy attorney can assist you in determining if you should file.
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WHAT TYPES OF DEBTS CAN BE DISCHARGED UNDER CHAPTER 13?
A Chapter 13 bankruptcy can eliminate the following debts:
Credit cards
Medical bills
Personal loans
Property partition orders, for example, are obligations arising from separation agreements and divorce rulings that are not related to domestic maintenance.
Defects in repossession (i.e. the amount you owe on your car after a repossession)
Except for claims resulting from driving while inebriated, auto accident claims are filed against you.
Many judgments, unless they are for a category of debt that is not dischargeable, are not dischargeable (ex., fraud or false pretenses).
Income tax liability from any return that became due more than 3 years before filing bankruptcy if the following conditions are met: I you filed the return more than 2 years before filing bankruptcy; ii) the return was not reassessed within 240 days of filing bankruptcy; and iii) the income tax liability is not the result of you filing a fraudulent return or engaging in tax evasion.
Business debts
Leases
Guaranteed company debt and co-signing for another’s debt are examples of guaranties.
Negligence claims
Debts accrued as a result of intentional or deliberate property damage (not personal injury)
Loomis and Greene can help you figure out which of your debts are dischargeable and whether you have any that aren’t.
WHAT DEBTS AREN’T DISCHARGEABLE IN A CHAPTER 13 BANKRUPTCY?
The following debts are not dischargeable in a Chapter 13 bankruptcy:
Obligations for spousal or child support
Student Loans
Income tax debt owed as a result of tax evasion, a return that was not filed more than two years prior to bankruptcy filing, or a fake return.
Penalties from any tax years where a return was due in the previous three years
Other types of tax liability, such as sales taxes and payroll taxes (although these types of taxes often will be paid through your Chapter 13 plan)
Debts incurred by fraud or false pretenses
Debts incurred by a false statement in writing (such as false credit application)
Debts incurred by embezzlement or larceny
Damages awarded as a result of a civil judgment for purposeful and malicious activities that resulted in the personal damage or death of another person.
Debts incurred as a result of a debtor’s inebriated driving causing death or personal injury.
Criminal fines and restitution
Loomis and Greene can help you figure out which of your debts are dischargeable in bankruptcy and whether you have any that aren’t.
