CHAPTER 13 BANKRUPTCY

CHAPTER 13 BANKRUPTCY

BankruptcyChapter 13 enables debtors with regular income to create a plan to repay all or part of their debts to creditors over a three to five year period. The plan will pay back secured creditors, and unsecured creditors will receive a portion of disposable income.  Unsecured creditors must receive at least as much as they would have received in a Chapter 7 bankruptcy.  If a debtor’s current monthly income is less than the applicable state median income, the plan is only for three years, generally.  If a debtor’s current monthly income is greater than the applicable state median income, the plan is generally five years.  In no case may a plan be longer than five years.  A debtor must have regular income to fund the plan.

Debt Limits:

For individuals to be eligible to file under Chapter 13 the debt limits for unsecured debts must be less than $360,475 and $1,081,400 for secured debts.  So if a debtor has multiple houses, that debtor may not be eligible for a Chapter 13 bankruptcy.

Foreclosure and Chapter 13 Bankruptcy:

If a debtor is facing foreclosure but wants to keep his/her home, the debtor should consider Chapter 13 Bankruptcy compared to Chapter 7. In a Chapter 7 Bankruptcy a debtor must be current on payments to secured creditors if the debtor wants to keep the collateral.  For example, if the debtor is 6 months behind on his/her mortgage, the debtor would have to cure the arrearages and stay current on the mortgage to be able to keep the home.  However, with a Chapter 13 Bankruptcy, the debtor in the same example would be able to cure the arrearages during the life of the plan and pay the mortgage payment.  So if the debtor has a 5 year plan, the debtor would pay back the 6 month payments during the 5 years and make the regular mortgage payment. Additionally, the debtor can attend mediation with the bank to negotiate the terms of the mortgage.

Second Mortgages in a Chapter 13 Bankruptcy:

If a debtor is facing foreclosure but wants to keep his/her home, the debtor should consider Chapter 13 Bankruptcy compared to Chapter 7. In a Chapter 7 Bankruptcy a debtor must be current on payments to secured creditors if the debtor wants to keep the collateral.  For example, if the debtor is 6 months behind on his/her mortgage, the debtor would have to cure the arrearages and stay current on the mortgage to be able to keep the home.  However, with a Chapter 13 Bankruptcy, the debtor in the same example would be able to cure the arrearages during the life of the plan and pay the mortgage payment.  So if the debtor has a 5 year plan, the debtor would pay back the 6 month payments during the 5 years and make the regular mortgage payment. Additionally, the debtor can attend mediation with the bank to negotiate the terms of the mortgage.

Cram Down in a Chapter 13 Bankruptcy:

  • Investment Property

If a debtor owns investment property, then the debtor may be able to cram down the first and second mortgage to the properties fair market value. A cram down adjusts mortgage terms in bankruptcy court and makes them affordable. Under the cram down process, an investment property that is upside down is “crammed down” to fair market value. The debtor is then given up to five years to repay the loan. For example, a person who bought investment property for $150,000.00 which has gone down in value to $100,000.00 can take advantage of the cram down which would result in a new principle of $100,000.00.

  • Car

If a debtor purchased a car more than 910 days before filing Chapter 13 the debtor can cram down the secured portion of the car loan to the car’s current value. However, the rule does not allow cram downs of car loans made within 910 days of filing the Chapter 13 petition if the car was purchased for the debtor’s personal use. Therefore, if the debtor can show that the car was purchased for someone else, for the debtor’s wife, children, business, etc., then the debtor could qualify for the cram down.


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