A Chapter 13 Bankruptcy differs from a Chapter 7 in that it is a reorganization, not a liquidation and the Debtor has to pay some of their unsecured debt back through a plan to the Trustee. People who cannot go into a Chapter 7 Bankruptcy because their income is above the level allowed in the means test file Chapter 13 Bankruptcies instead. Your attorney helps you develop a budget of the necessities you and your family need every month. After those are paid for, the remaining monies are paid through the plan to the unsecured creditors to receive their pro-rata amount. The Secured Creditors like the finance companies for a debtor’s car or a Mortgage Bank receive their full amount outside the plan. Otherwise they would make a Motion For Relief From the Automatic Stay and Foreclose on their interest or repossess their property.
Debtors who have already gone Chapter 7 Bankruptcy often go Chapter 13. They will not receive a discharge on any debts they’ve accrued from the filing of the Chapter 7 for four years. After 4 years, if a Debtor files a Chapter 13, he/she would be eligible for a discharge on those debts. The experience of your lawyer is paramount so that a Debtor files at the proper time. Sometimes filing a Chapter 7 Bankruptcy and discharging a large amount of unsecured debt may reduce a Debtors Debt to Income (DTI) Ratio giving that Debtor the ability to fit into the guidelines to modify their mortgage.
There are things that can be done in Chapter 13 Bankruptcies that cannot be done in a Chapter 7. A Debtor may strip a second mortgage in a Chapter 13 Bankruptcy if that second mortgage impinges on the Debtors homestead exemption. The Debt (the second mortgage) is converted to a non-secured debt and the holder of that mortgage only receives a pro rata share of the Debtors payment to the Trustee for disbursement pursuant to the Plan. Plans can be 3, 4, or 5 years. Usually when a Debtor is discharging a large amount of debt and keeping a nice residence the Court wants to see the Debtor pay for a longer time. Likewise, a Debtor paying off his debts at a higher percentage may choose a shorter plan.
Chapter 13 Bankruptcies are generally Consumer Bankruptcies. There are debt limits for secured and unsecured debts that the Debtor must remain below in order to stay in a chapter 13. That limit is close to $400,000.00 for Unsecured Debts and 1.15 Million for Secured Debt. One of the problems that seems to re-occur frequently is Student Debt putting a Debtor over the unsecure debt limit. I have been able to successfully argue that student debt should be treated differently in the past. Sometimes A debtor who wasn’t over the unsecure debt limit strips a second mortgage and turns it into a unsecure debt that puts that debtor over the limit for unsecure debts. The Debtor then has to decide whether to forgo the advantage of stripping the second or converting to a Chapter 11 Bankruptcy where the rules are much more favorable to creditors than Chapter 13. Only an experienced Bankruptcy Attorney can see these issues and prepare their client properly so that they may receive the maximum benefit. Call me and I’ll help you decide the proper direction.