Chapter 13 Bankruptcy

Chapter 13 Bankruptcy Basics

A Chapter 13 Bankruptcy is usually filed if a debtor:

(1) Is in default in their mortgage and wants to save their residence and get the mortgage reinstated

(2) Has certain non-exempt property (i.e. house with significant equity) that would be liquidated by a trustee in Chapter 7

(3) Has certain debts that might not be discharged in Chapter 7 Bankruptcy (although the former Chapter 13 Bankruptcy “super discharge” was significantly eroded by BAPCPA)

(4) Is not eligible for a Chapter 7 discharge, usually because of a prior Chapter 7 discharge within the past eight years

(5) A Chapter 7 filing would be presumptively abusive according to the Means Test Formula.

The underlying premise of Chapter 13 Bankruptcy is that a debtor has sufficient income to not only meet all of their cost of living expenses (i.e. housing, food, clothing, transportation, etc.), but also has money left over to pay down their debts. The excess income (“disposable income”) gets paid by you to your Chapter 13 Trustee once a month for the life of your Plan (usually 3 to 5 years).

Monthly Re-payment Plans

In Chapter 13 Bankruptcy the debtor gets to retain all of their property, but must make monthly payments to a Chapter 13 Trustee for the life of their Plan.  From these payments the Trustee must pay in full:

• Past due amounts on defaulted secured debt (mortgages, car loans, etc.)
• Priority debts (recent taxes, past due child support, etc.)

What is left of the payment goes to unsecured creditors (credit cards, medical debt, etc.) often for a fraction of their outstanding debt.

For a debtor’s proposed monthly payment to be accepted by the court, the total payout must equal to what the liquidation value of debtor’s estate would have been if a Chapter 7 had been filed. The debtor must also pay to the Trustee all of his disposable income each month. The statute makes it clear that the “projected disposable income” that you must pay to the Trustee is determined using almost the same formula used to determine a “presumption of abuse” in Chapter 7, with two notable exceptions:

1. A Chapter 13 debtor can deduct from their CMI child support payments, foster care payments and disability payments received for dependent children.
2. A Chapter 13 debtor can also deduct contributions made (both voluntary and involuntary) to qualified retirement plans, as well as repayment of loans to retirement plans.

Despite the statutory language, some Courts and Chapter 13 Trustees also look at your actual income and expenses (from your petition rather than from your Means Test) to determine how much your monthly payment to the Trustee must be.

Two Types of Re-payment Plans

1. 3 Year Plan – For debtors whose Current Monthly Income is less than their area’s Medium Family Income
2. 5 Year Plan – For debtors whose Current Monthly Income is equal or greater than their area’s Medium Family Income

If debtors can fully repay creditors in less time, they may do so. If a debtor on a 3 year plan needed more time they could confirm a plan of up to 5 years with court permission. This would typically be done to catch up on mortgage debt.

Payment Due dates

• First payment to the Trustee is due 30 days after Chapter 13 bankruptcy is filed
• Mortgage payments are paid according to mortgage terms.

Confirmation Hearing

A Chapter 13 Plan is scheduled for a Confirmation Hearing approximately 45 days after the Meeting of Creditors, which is long before all creditors’ claims are required to be filed. 

Discharge

A Chapter 13 Discharge is entered:

1) After all payments have been made per the confirmed plan
2) After any miscellaneous matters required by the confirmed Plan have been fully performed. 

With limited exceptions, any amounts still owing on your unsecured debts at the time of the entry of your Discharge are forgiven.

Chapter 13 Bankruptcy in Perspective

A Chapter 13 debtor must be prepared to make a long-term commitment, and many plans fail because the nature of Chapter 13 leaves a debtor with very little margin for error.  Remember, a debtor must devote all of their disposable income for the life of the plan, which can be as short as 3 years or as long as 5 years. Because of this a Chapter 13 debtor has no “play” in their budget to deal with unexpected expenses (major car repairs, etc.) or income disruptions (layoffs, illnesses, etc.). It takes a lot of determination and a little good luck to successfully obtain a Chapter 13 discharge, but frequently it is worth the effort because the pay off (usually saving the family residence from foreclosure) can be so great.

Call our office today at (845) 343-6227 and speak to Attorney Michael O’Leary to arrange a free consultation to discuss your options regarding bankruptcy and other alternatives to bankruptcy.

Bankrupcy lawyers with offices in Middletown, New York serving Orange, Sullivan, Ulster and Dutchess Counties and communities including Newburgh, Port Jervis, Goshen, Monticello, Liberty, Ellenville, New Paltz, Kingston and Poughkeepsie.

This Law Firm proudly practices Bankruptcy Law, helping clients file cases under Chapters 7 and 13.  According to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, we are considered to be a Debt Relief Agency.