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Chapter 13 Bankruptcy

A Chapter 13 bankruptcy helps debtors reorganize their finances so that their debt is repaid in a payment plan over a period of three to five years. The debts are then discharged after the debtor completes the payments.

Advantages of Chapter 13

Even though the debtor must make debt payments, a Chapter 13 bankruptcy has many advantages over a Chapter 7 bankruptcy. The biggest advantage to many debtors of a Chapter 13 bankruptcy is that it can enable qualifying homeowners to eliminate your second mortgage and keep your house! This process is called lien stripping and it can be done in California if the value of the property is less than the outstanding balance on the first mortgage. To establish this, the debtor needs to obtain an appraisal of the property and then file a motion to have the second mortgage discharged. This can result in a significant windfall to a Chapter 13 debtor. The option to strip a second mortgage is only available in Chapter 13 bankruptcies. With a Chapter 7 bankrupcty, debtors must choose between keeping the property and the mortgages, or surrendering the property and discharging the debt. However, with a Chapter 13 bankruptcy, a debtor can keep the property and discharge the second mortgage!

A Chapter 13 bankruptcy can also reduce a debtor's car payment by a process called a cramdown if the value of the vehicle is less than the amount of the vehicle's secured debt. In a cramdown, the amount of the secured debt on the vehicle is reduced to the current value of the vehicle and the remaining balance of the loan becomes unsecured debt which can be discharged by completing the Chapter 13 plan. To be eligible for a vehicle cramdown, the debtor must have purchased the vehicle at least 910 days prior to filing bankruptcy.

Another important advantage of a Chapter 13 bankruptcy is that it can enable homeowners to save their homes from foreclosure by curing delinquent mortgage payments over time. Rather than having to immediately repay mortgage arrears to prevent foreclosure, a Chapter 13 debtor can repay the arrears slowly over time at an affordable payment. Further, a Chapter 13 bankruptcy enables debtors to reschedule the payment of debts over the duration of the bankruptcy plan. Chapter 13 can also provide protection for the debtor's co-signers. In addition, during a Chapter 13 bankruptcy, the debtor makes the payments directly to the bankruptcy trustee and the creditor therefore no longer has direct contact contact with his or her creditors.

A further advantage of a Chapter 13 bankruptcy is that all credit collections and debt enforcement, including lawsuits, wage garnishments, foreclosures and even harassing telephone calls must stop immediately . When the Chapter 13 bankruptcy is filed, all creditors receive notification from the court advising creditors of the bankruptcy. After receiving this notification, creditors are required to halt all credit actions and they are required to only contact the debtors' attorney rather than continue to contact the debtors directly. If a foreclosure or wage garnishment needs to be stopped before the court can send notice to creditors, you can advise your attorney and he or she can send out an urgent notification. If creditors violate the bankruptcy stay, they can be liable for penalties and sanctions.

Chapter 13 Process

A Chapter 13 bankruptcy involves the preparation of a payment plan based upon the debtor’s income and his or her expenses.  The amount that is paid into the plan by the debtor is generally based upon, not the amount owed, but the rather upon the debtors ability to pay.  After calculating the debtors income and expenses, the amount of money left over after the payment of living expenses will be paid into the plan, even if this amount only pays the creditors pennies on their dollars.

After the bankruptcy paperwork is filed, a creditors' meeting will be held approximately five weeks later at the courthouse. At the creditors meeting, the bankruptcy trustee will ask the debtors questions about their finances and the proposed Chapter 13 plan. The plan will then be confirmed by the bankruptcy judge. The debtor will then be required to make the plan payments to trustee throughout the duration of the plan and keep the mortgage payments current.

A Chapter 13 plan will last between three to five years, unless the debts are fully repaid earlier.  After the plan is confirmed, the debtors can file a motion to modify the plan if their income decreases or their expenses increase in the future. At the completion of the plan, all of the debtor’s unsecured debts are discharged.

We Can Help

The decision as to whether to file bankruptcy and the preparation of a Chapter 13 petition for bankruptcy is a complex and difficult process. If the documentation is not prepared properly, you can suffer serious financial and legal consequences. Accordingly, it is important to consult an attorney to guide you through your bankruptcy. We would be happy to meet with you and provide you with a free initial consultation.