If you think a Chapter 13 bankruptcy proceeding may offer a solution for you, contact Joseph L. Grima and Associates for a free consultation toll-free at 800-603-3333, or contact us online using the form on this website.
While the thought of paying for legal help may seem counterintuitive when you are already facing financial difficulties, the fact is, the input and advice you obtain from an experienced and qualified bankruptcy attorney can not only save you money in the long run, but also relieve you from stress, frustration, confusion, and failure. It is one thing to “throw good money after bad,” and quite another to be “penny wise and pound foolish.”
Unfortunately, it is all too easy for individuals or couples to get into debt trouble. Often, the problem does not come from uncontrolled spending or a lack of discipline. Many times, it comes from an unfortunate series of events, coupled with easily accessible credit. According to the American Bankruptcy Institute, while the number of business bankruptcy filings, though fluctuating, has remained fairly constant over the last three decades, the number of consumer filings has been increasing significantly. In 2011, non-business bankruptcy filings topped 1.3 million—over four times as many as were filed in 1980. Today, a full 96% of all bankruptcy filings are related to personal debt.
Debt problems can develop very quickly. For example: perhaps you or your spouse lost a job, and your income dramatically dropped. As a result, you accessed cash from a credit line—temporarily, or so you thought—to stem a gap in cash flow. But the debts and the payments kept mounting. Other problems crept up: a costly medical test was not covered by the health insurance plan, the car needed an expensive repair, the children’s orthodontic bills become due. When you encounter these problems, it is easy to believe that the difficulty is temporary, and you may be optimistic and hopeful: you or your spouse will soon land a new job, and you will be able to claw your way back out of debt. But before you know it, you have extended your financial capabilities beyond the point of recovery.
Whatever the cause, it is possible to find yourself in a situation where, even with a steady stream of income, you are running into serious trouble meeting all of your bills and expenses from month to month, and you are rapidly running out of resources to cover the difference.
In these situations, while you are not exactly bankrupt, you also know that you cannot continue to pay out more than you take in without ultimately facing the prospect of losing everything—your house, your car, your retirement savings. When you are confronted with this prospect, filing a Chapter 13 bankruptcy may be the right answer for you.
Different types of bankruptcies are referred to by the chapter number in which they are described in the United States Bankruptcy Code. In a nutshell, Chapter 13 is termed the “wage-earners” filing, because it allows a person who has a steady income to restructure his debt so that it is manageable based upon his actual income.
Currently, an individual is eligible for Chapter 13 if his or her unsecured debts are less than $360,475, and his secured debts are less than $1,081,400 (these figures are adjusted periodically). There are also some other requirements that the debtor must meet, but the test is not as stringent as the test for filing under Chapter 7. Those who do not meet the test required under Chapter 7 can often meet the requirements for filing under Chapter 13.
Significantly, one benefit of Chapter 13 is that it allows an individual who has fallen behind in mortgage payments and facing foreclosure to save his home. It also allows an individual to restructure other secured debts—such as an automobile—rather than simply sacrifice the property to repossession.
However, Chapter 13 is a process, not a quick fix or total remedy.
The Chapter 13 process requires the debtor to submit to the bankruptcy court a listing of all assets and liabilities, all debts and the creditors to whom the debts are owed, all income and expenditures, and a list of all financially-related contracts to which the debtor is a party (for example, a lease). The debtor must have gone through debt counseling and submit a copy of any debt repayment plan received from the counseling agency. He must supply evidence of income, as well as a listing of current expenses (including regular living expenses, such as food, utilities, taxes, insurances, etc.), as well as any known anticipated expenses, and any other information related to financial interests he holds—including income of a spouse, even if the debtor is filing individually.
The purpose of providing this information is to allow the Chapter 13 Bankruptcy Trustee to get a clear financial picture of the individual, in order to determine how to structure and allocate repayments to creditors, while still allowing that individual to meet necessary living expenses. Taking all of the information, the Trustee develops a repayment plan. If the court confirms the plan, the debtor, as well as all the creditors, are bound by its terms.
Repayment plans usually run for three years, but can extend to five years. The Trustee not only evaluates the case and formulates the plan, but also acts as the agent for collecting funds from the debtor and dispensing them to the creditors during the plan’s term. The plan thus operates like a debt consolidation, allowing an individual to make a single fixed payment to the Trustee, who then distributes the amounts to debtors. During this period, so long as the creditors are receiving their payments according to the terms of the plan, they cannot seek alternative recourse to the debtor, such as wage garnishment, foreclosure, repossession, or lawsuits.
The debtor, also, must strictly abide by the terms of the plan. Because it is structured to address debt, the debtor must live under a strict and fixed budget during the entire process until the case is closed. During this time, the debtor may not incur any new debt without the approval of the Trustee, since any additional cash outlays could seriously compromise the ability of the debtor to meet the terms of the plan.
Failure to comply with all of the conditions throughout the full term of the plan jeopardizes the entire plan, regardless of how long it has been in place and regardless of how much of the debt has been repaid. Failure to comply will cause the court to dismiss the petition and allow the creditors to pursue any other recourse available to them.
Finally, while Chapter 13 involves debt repayment, it is not necessarily the case that all debts are fully repaid at the end of the plan term. While the court cannot dismiss the interests of creditors with secured loans, some unsecured loans (such as credit card debt) can be ultimately discharged at the end of the term as satisfied, even if all of the borrowed monies have not been fully repaid.
While a Chapter 13 bankruptcy does contain stringent terms, the important advantages it has compared to a Chapter 7 bankruptcy filing should be considered by those who face grave debt problems.
First, Chapter 13 allows the debtor to retain certain important assets, rather than lose them to foreclosure, repossession, or liquidation.
Second, like Chapter 7 filings, while a Chapter 13 bankruptcy will appear on a credit record for seven years following the filing of the petition, many creditors will view a Chapter 13 bankruptcy more favorably. This is because, under Chapter 13, the debtor is making a serious effort to repay the loans. In addition, a Chapter 13 petition indicates that the debtor has a steady income. These factors may encourage lenders to loan, and thus allow the debtor to begin rebuilding a good credit record more readily, especially if the debtor has sought to restructure his debt through Chapter 13 before serious adverse actions have been taken by creditors, such as sending debts to collection agencies, or having foreclosure proceedings initiated.
While one cannot predict exactly how credit agencies will score a Chapter 13 filing, the fact is, those who are facing serious debt problems are usually not sacrificing a “good” record for a “bad” record connected to a bankruptcy filing. It is much better to solve your problem when you have some options than to wait until you are backed into a corner. The question is not whether a Chapter 13 filing will hurt your credit record, but whether it will be less damaging than failing to deal with a debt problem. Chances are, your credit record is already in trouble, and, in all fairness, should be the only a minor concern.
While the information above outlines some of the basics about filing Chapter 13, it is clearly not something you should consider lightly. Not only are there some complex legal requirements, but it is important to have some idea, beforehand, what you may be committing to should you elect to proceed. It is in your best interests to get qualified legal advice before making a decision.