Top Five Reasons for Filing Chapter 13 Bankruptcy

Typical Reasons Why Someone Would Need to File Chapter 13

Typical Reasons Why Someone Would Need to File Chapter 13

Chapter 13 Bankruptcy is sometimes referred as “personal reorganization” or “wager earner plan” bankruptcy. It is different than Chapter 7 bankruptcy, or so-called “straight bankruptcy,” because Chapter 13 requires regular monthly payments to the Chapter 13 Trustee. It is different than Chapter 11, which is the option normally used by businesses to reorganize.

People who file Chapter 13 have to file and get Bankruptcy Court approval of a “Chapter 13 Plan” which enables for them to reorganize their financial affairs. Chapter 13 is limited to individuals (cannot be a corporation) with regular income.

At Albuquerque Business Law, we seek to qualify their clients for Chapter 7 as the first option, for the simple reason that Chapter 7 is a process that lasts about 100 days, and Chapter 13 typically lasts three to five years.

However, there are several instances where Chapter 13 is an excellent, and perhaps necessary, option.

1. Curing a Mortgage and Stopping Foreclosure

At Albuquerque Business Law, we help people keep their homes through either through foreclosure defense and out-of-bankruptcy loan modification or through a Chapter 13 Plan. On another blog post, I will discuss the pros and cons of foreclosure defense versus Chapter 13. For this article, I am going to limit the discussion to briefly discussing Chapter 13 as a method of saving your home.

The benefits of Chapter 13 is that it is certain to work if the homeowner can afford the Chapter 13 payments. That is a good aspect about Chapter 13 in general, versus other remedies, is that there is a definite, and predictable remedy that is enforced by a federal court.

A Chapter 13 Plan that saves a house from foreclosure is based on taking the arrearages and paying them over time through the Plan and then making the current mortgage payments directly. A benefit of Chapter 13 is that the bank has to accept the payments after the Chapter 13 is filed, unless the house was actually sold at a foreclosure sale prior to filing.

2. Curing a Delinquent Car Loan and Stopping Repossession or Getting the Car Back

Chapter 13 will also work to save a delinquent car loan in the same manner, even if the car has been repossessed (so long as it has not been sold).

3. Getting Caught Up on Back Child Support or Alimony

You can pay your back child support or alimony through Chapter 13 so long as you are able to pay your current child support or alimony payments. A Chapter 13 can actually prevent someone with delinquent child support or alimony from possible jail or contempt action under state law. However, the back payments must be paid in full during the Chapter 13 Plan. Chapter 13 cannot be used to avoid support payments, but it can be used to pay them in an orderly fashion.

4. Dealing with Certain Non-Dischargeable Debts like Taxes and Student Loans

Although Chapter 13 cannot discharge taxes or student loans that are non-dischargeable in Chapter 7, Chapter 13 of the bankruptcy code has several beneficial provisions that could enable someone to reorganize the debt and make payments in an orderly and predictable fashion. Chapter 13 can thus be used to enable someone to regain control of their relationship with certain creditors if the creditor will not be reasonable.

5. Assisting People who make Too Much for Chapter 7

With the “Means Test” that Congress added to the Bankruptcy Code in 2005, many people who have financial trouble are ineligible to file for Chapter 7. The people who are required to file Chapter 13 are people who, generally speaking, make too much to file Chapter 7. In such a circumstance, the individuals must either try to work things out on their own or file Chapter 13 and pay off a portion of the debt over a five year period, unless they can pay all their unsecured debts in full sooner.

There are several reasons why Chapter 13 works for higher income people. First, bankruptcy cuts off interest payments, so even with the costs of bankruptcy (attorney fees and trustee commissions), the avoidance of high interest rates often makes Chapter 13 a better deal.

Second, out of court workouts often don’t work. If someone has a higher income, often a creditor will seek to file a lawsuit and garnish wages rather than accept payments. Despite the advertisements regarding the claims that companies can work out your debt without a bankruptcy, generally the only way to force a creditor to stop collection is by filing a bankruptcy petition.

Finally, even someone with a strong income may have too much debt to pay it back within any reasonable period of time. Through Chapter 13, individuals pay all of their “disposable income” to the Chapter 13 Trustee, and after the Plan is completed, the remaining debts will be discharged. This can allow for a financial fresh start after the individuals earn their discharge through regular monthly payments over time.

Summary

Although most people who file for bankruptcy file under Chapter 7, Chapter 13 can be a great option for certain individuals. Please call our office for a free consultation to learn more.

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