Chapter 13 Bankruptcy Is Not Just For People Who Can Pay Their Debts



Part I

So you are considering filing bankruptcy and one thing you know for certain is that you are not going to file Chapter 13. After all, that’s the type of bankruptcy people file who can pay their debts and that’s not me. I can barely pay my electric bill, much less make payments on my credit cards.

Well not so fast. There are many individuals who file Chapter 13 who are just as bad off financially, if not more so, than those who file Chapter 7. The first thing you need to understand is that if you file Chapter 13, the Court will only make you pay as much of your unsecured debt, like credit cards and medical bills, as you are able pay. If all you can afford to pay is 10 cents on the dollar, then that is all you will have to pay and the balance will discharged at the end of your plan.

Where the real benefit of Chapter 13 comes in is how you can deal with your secured creditors, like your mortgage or your car payments. If you have a car loan and are considerably “upside down” on it, in other words you owe more than it is worth, then you may be able to get away with paying only the value in full, whereas the rest of the debt on it gets treated as an unsecured creditor. Let’s say for example you have a car that is worth $10,000.00 and the loan against it is $15,000.00, with an interest rate of 18%. Let’s also assume that your plan provides for payment of 20 cents on the dollar to your unsecured creditors. You would only have to pay the $10,000.00 “secured claim” back in full with an interest rate of about 5% and $1,000.00 with no interest on the remaining $5,000.00. This is referred to by bankruptcy lawyers as “cram down”.

On the other hand, if you had filed a Chapter 7, you would probably have been required by the creditor to “Reaffirm” (agree to pay) the entire balance on the car loan. Not only that, but you would be required to either be current or get current right away on the loan. If you file Chapter 13, you do not have to be up to date with your secured creditors and you have 30 days from the date you file your case to begin making your plan payments.

(Please note that the full benefit of “cram-down” is not available for automobiles purchased within 910 days of filing bankruptcy).

Although Chapter 13 does not allow you to change the terms of your home mortgage, such as your payment, balance or interest rate, it does allow you to make up your missed payments over a period as long as 5 years.

Another benefit of Chapter 13 is that you can usually get a case started for far less money up front than is required for Chapter 7. Since most individuals contemplating bankruptcy usually don’t have a lot of money lying around, that can be a big factor. Whereas, a Chapter 7 bankruptcy generally requires a substantial up front payment of legal fees and court costs, in Chapter 13, as a general rule, the legal fees are paid through the plan.

So you are behind on your house and car and have no money. If you think that Chapter 7 is your answer you may want to think again. How are you going to come up with the money to catch up your house and car and pay those legal fees? You may want to consider Chapter 13, where you may only have to come up with the court costs to get started and will have 30 days to start making payments, with no large catch up payments required.

In my next post, I will discuss some more of the benefits of Chapter 13.

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