What is a Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy is quite different from Chapter 7 Bankruptcy. In a Chapter 13 Bankruptcy you submit a “Plan” to pay creditors. Depending on your circumstances, your “Plan” may call for a payment such that your unsecured creditors receive almost zero, it may call for payment of 100% of your debt, or it may call for payment of somewhere between zero and 100%. In those instances where your creditors are paid virtually nothing, your Chapter 13 Bankruptcy may highly resemble a Chapter 7 Bankruptcy. Chapter 13 Bankruptcy is often used to force mortgage creditors to allow you to catch up delinquent mortgage payments over a period of 3 to 5 years. In many cases you may be able to save your home from foreclosure, and still cancel your unsecured debts. In some cases where you have a 2nd mortgage, you may even be able to eliminate the 2nd mortgage altogether. A Chapter 13 Bankruptcy has other benefits which should always be considered before you make the final decision to file a Chapter 7 Bankruptcy.Why choose a Chapter 13 Bankruptcy?
Sometimes people are forced to file Chapter 13 Bankruptcy because they make “too much money” according to the Bankruptcy Laws; however, there are reasons why someone may elect to file a Chapter 13 Bankruptcy even though they are eligible for a Chapter 7. These reasons include, but are not limited to, the potential for saving a home from foreclosure, eliminating second mortgages, and discharging divorce obligations, with the exception of child support, alimony, and maintenance.
Will I have to pay back all of my unsecured debt in a Chapter 13 Bankruptcy?
The amount of unsecured debt (credit cards, medical bills, etc…) you are required to pay back depends almost entirely on your income. A second factor which will dictate the amount you have to pay back to unsecured creditors is “equity” in property. If you have excessive “equity” in your personal property, or real estate, you may have to pay a higher percent to unsecured claims in order to keep your property. In a Chapter 13 your payment may be such that your unsecured creditors receive almost zero, it may call for payment of 100% of your debt, or it may call for payment of somewhere between zero and 100%. This percentage is determined entirely by your income and/or the amount of excess “equity” you have in property. If your income is low enough that you are eligible to file a Chapter 7 Bankruptcy, and you do not have too much “equity” in property, but you elect to file a Chapter 13, your unsecured creditors will receive virtually nothing.
How long will I be required to make payments to the Bankruptcy Court?
A Chapter 13 Bankruptcy can last anywhere between three and five years. If you are forced into a Chapter 13 because of your income, you must make payments for the entire five year period. If you elect to file a Chapter 13 for other reasons, your payments will last as long as it takes to accomplish your goals (e.g. paying your mortgage current) with the limits still being three years as the shortest payment period, and five years as the longest payment period.
What happens at the end of my payment period in a Chapter 13 Bankruptcy?
When you complete your Chapter 13 Plan you will receive a Discharge Order from the Bankruptcy Court. The Discharge Order is what actually eliminates the debts you sought to get rid of at the beginning of your Bankruptcy. If you do not pay all of your payments required by the Bankruptcy Court, you will not receive a Discharge Order and will still owe any debt not already paid through the Chapter 13 Bankruptcy.
What happens if I need to skip a payment because of some hardship?
If your child becomes sick, your employer is cutting hours, a medical bill comes due, or you have some other hardship that you face in a particular month, you can modify your Chapter 13 payment plan to defer payment for one or two months to allow time for you to get back on your feet. The number of payments you defer will then be tacked on to the end of your Chapter 13 Bankruptcy. So if you defer two payments, your Chapter 13 will last two months longer than originally scheduled. In general, you can defer up to 6 payments. In so doing you Plan would then become 6 months longer than originally planned.