Chapter 13 Bankruptcy – What Is It?

A Chapter 13 bankruptcy differs from a chapter 7 bankruptcy in that you will be required to repay some of your debts through the bankruptcy process.  Chapter 13 bankruptcy has many tools that a chapter 7 bankruptcy does not however it is a much longer process.  A typical chapter 7 bankruptcy in Arizona lasts about four to five months while a chapter 13 bankruptcy will last anywhere from three to five years.

Do I Qualify to File a Chapter 13 Bankruptcy?

In order to qualify for a chapter 13 bankruptcy you must have regular income coming into your household.  Further, you are limited as to the amount of debt that can carry and still file a chapter 13 bankruptcy.  Currently you can have no more than $360,475 in unsecured (credit card-type debts) and no more than $1,081,400 in secured (mortgage-type) debts.  If you have regular income and your debts are below the above limits then you will qualify for a chapter 13 bankruptcy.

Chapter 13 Bankruptcy – How It Works

In a chapter 13 bankruptcy you will be permitted to restructure some of your debts and will be required to make a monthly payment.  This is accomplished through the chapter 13 plan.  The chapter 13 plan is a proposal to the bankruptcy court and your creditors as to how you will be dealing with each of their debts.

Before proposing a chapter 13 plan, we will analyze your debts, income, monthly expenses, and assets to determine what you will be required to pay.  While it is almost impossible to tell you what your monthly chapter 13 plan payment will be without preparing your bankruptcy documents in their entirety, your plan payment will likely mirror your monthly disposable income.  Disposable income is essentially what you have left over after all of the monthly bills are paid.

In most cases the agreed upon monthly payment will not pay all debts owed in their entirety.  If you make the monthly payment as agreed throughout your bankruptcy case, the balance left over on your debts at the end of your bankruptcy case will be discharged/eliminated.

Your creditors will have an opportunity to provide input into your proposed chapter 13 plan and can even object if they believe you are not following the rules set out in the bankruptcy code. Once there is an agreement between you, your creditors, and the bankruptcy trustee, the bankruptcy judge will confirm your chapter 13 plan.

Benefits of a Chapter 13 Bankruptcy

On the surface, a chapter 7 bankruptcy appears much more attractive than a chapter 13 bankruptcy.  A chapter 7 bankruptcy is a much shorter process and you don’t have to pay any of your creditors back.  A chapter 13 bankruptcy is longer and you are required to make a monthly payment.  So why would anyone choose a chapter 13?  The first answer is chapter 13 may be the only option.  If you make too much money to qualify for a chapter 7 bankruptcy the alternative is usually a chapter 13 bankruptcy.  The second answer is there are many more tools in a chapter 13 for dealing with debt than a chapter 7.  For instance:

Chapter 13 Cram-Down

In a chapter 13 case you can reduce the amount you pay on your car and even reduce the interest rate through a process called the “cram-down.”  In a chapter 13 bankruptcy you will only be required to pay the value of your car instead of what you owe.  For instance, if you are buying a truck, and you owe $25,000 on it, but it is only worth $12,000, then you would only be required to pay the $12,000 over the life of your chapter 13 bankruptcy.

Further, you can reduce the interest rate.  So if you are paying 10% on your truck loan, in a chapter 13 we can reduce it down to about 5.00%.  The only catch to the cram-down is that your car must have been purchased at least 910 days prior to the filing of your bankruptcy case in order to qualify.

Lien Stripping – Eliminating Your Second Mortgage or Home Equity Line of Credit (HELOC).

Many of the chapter 13 bankruptcies I file are for people who are having difficulty with their mortgage payment.  In Arizona particularly, a big problem is that people’s homes are worth considerably less than what they owe – especially if there is a large second mortgage or HELOC.

In a chapter 13 bankruptcy we can eliminate your second mortgage or HELOC, making it not only more affordable on a monthly payment basis but overall you will owe much less on your home.  The catch to the lien stripping is that the value of your home must be less than what you owe on your first mortgage.  For example, if you owe $150,000 on your first mortgage, then the value of your home must be less than $150,000 for you to be able to remove any additional or junior liens.

Behind on House Payments?

If you are behind on your house payments a chapter 13 bankruptcy is a good option to help you keep your home and get caught up on the missed payments.  In the chapter 13 plan we can propose a payment that will allow you to stay in your home and give you three to five years to get caught upon missed payments.

A chapter 13 bankruptcy requires a commitment on your part but can eliminate most of your debt and save you thousands on car loans and other secured debt.

Set Up a Free Bankruptcy Consultation Today

I offer a free bankruptcy consultation where we can discuss your specific situation and determine if chapter 13 bankruptcy is a good option for you or if there are non-bankruptcy alternatives that will help you with your debt problems.

Arizona bankruptcy attorney John Skiba can be reached at (480) 420-4028 or via email at john@skibalaw.com .