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Chapter 13 Bankruptcy

WHY FILE CHAPTER 13 BANKRUPTCY?

Chapter 13 is a powerful tool used by individuals with a regular source of income to reorganize debt and in many cases, pay back only pennies on the dollar to unsecured creditors. Chapter 13 consists of a debt repayment plan that ranges anywhere from 36 to 60 months and allows one to:

  • stop debt collection activity/harassment
  • stop wage garnishment/liens/frozen bank accounts
  • stop debt collection lawsuits
  • stop foreclosure / repossession
  • stop interest from accruing and pay back most unsecured debts at no interest
  • refinance certain loans with security interests (i.e. vehicle installment loans)
  • keep everything you own
  • discharge a portion of unsecured debts or secured debts on surrendered collateral
  • spread out loan arrears (i.e. missed mortgage payments) over the applicable repayment period
  • get immediate relief without having to pay the full attorney fees and court costs of Chapter 7
  • consolidate most or all debts into one lower, single payment

Chapter 13 is similar to debt consolidation, but unlike debt consolidation programs that are voluntary for creditors to participate in and where high interest and fees continue to accrue, Chapter 13 permits one to pay down unsecured debt without accruing interest, fees, or creditors deciding to sue you and pursue judgments to take assets or money through liens and garnishments.

In Chapter 13, a single monthly, biweekly or weekly payment is made to the court-appointed bankruptcy Trustee who is responsible for paying all scheduled creditors who file claims to be paid.

WHO FILES CHAPTER 13 BANKRUPTCY?

A single individual, individual spouse or married couple can file for Chapter 13 bankruptcy relief so long as at least one person has a stable income of any type. Sometimes, one may file Chapter 13 for a specific purpose (i.e. stop a foreclosure). Often, one files Chapter 13 because he or she does not qualify for Chapter 7 because of income limitations or liquidation of assets. Chapter 13 allows you to keep everything you own and pay back only what you can afford to pay back based on your best efforts in paying all disposable income to creditors and doing so subject to the best interest of your creditors under the law.

CHAPTER 13 STOPS FORECLOSURE AND CAN SAVE YOUR HOME (or your vehicle)

Chapter 13 bankruptcy can be used to stop a foreclosure or sheriff's sale after a foreclosure judgment to save your home. Chapter 13 allows one to propose a repayment plan to continue regular monthly mortgage payments and catch up the missed payments (arrears) by making that arreage payable over the length of the proscribed repayment period, which may run from 36 months to as long as 60 months.

Unlike voluntary workouts or loan modifications, a bank does not have the choice to not work with you through the court in a Chapter 13. Any foreclosure lawsuit or proceedings on a judgment must be "stayed" immediately upon the filing of a Chapter 13 petition with the bankruptcy court. A court-appointed Chapter 13 bankruptcy Trustee examines the petition and plan to make sure it is in compliance with applicable law and to ensure that all parties are being treated fairly under the proposed repayment plan. If you are behind on your mortgage payments when you file bankruptcy, your regular mortgage payment is part of the single monthly payment you make to the bankruptcy Trustee and the Trustee is the one who pays your mortgage over the course of the proscribed repayment period.

In a successful Chapter 13 bankruptcy, the debtor emerges at the end of the plan with all arrearage paid and, with the loan in good standing, the debtor resumes making the regular mortgage payment directly to the bank and in most cases, without unsecured debt that is subject to the bankruptcy discharge. In much the same way as Chapter 13 stops foreclosure, Chapter 13 also stops repossession of a vehicle.

CHAPTER 13 CAN REFINANCE AN AUTOMOBILE LOAN

Is your car underwater? Well, maybe not literally, but do you owe more than what it's worth? If it has been at least 910 days (approximately 2 1/2 years) since the car was purchased and financed, you may be able to "cram down" the payment on the loan to the current fair market value of the vehicle rather than what you currently owe on the loan.

For example, if you purchased your vehicle 3 years ago and have a balance owing of $15,000, but your vehicle is only worth $9,000, you may be able to "cram down" the payment through Chapter 13 and pay back only $9,000. As an added benefit to the cram down provision, a vehicle paid through Chapter 13 can be refinanced at prime rate plus 2% which is currently 5.25%. Chapter 13 can save one a lot of money over the life of an installment loan and in many cases, get a much better deal on financing and repayment over the course of the Chapter 13 plan repayment period.

WHAT ARE THE DEBT LIMITATIONS IN CHAPTER 13?

There is no minimum amount of debt for one to be affored relief under Chapter 13 but there is a maximum. At a minimum, Chapter 13 is a feasible option if any amount of debt has created a burden to pay back debts and existing liabilities. The law does limit the availability of Chapter 13 to those having less than $360,475 in unsecured debt and no more than $1,081,400 in secured debt(s).

HOW MUCH DOES IT COST TO FILE FOR CHAPTER 13 BANKRUPTCY?

For a case filed in Central or Southern Indiana, the costs associated with filing Chapter 13 are typically:

  • your attorney's fee (ranging $3,500 to $4,000)
  • the court's fee to file the case ($281)
  • the cost of mandatory pre-filing credit counseling ($25 to $50)
  • the bankruptcy Trustee's administrative fee (7.5% of payment for cases in Central/Southern Indiana)

To file your case with the bankruptcy court, you must pay the court's filing fee and take the mandatory pre-filing credit counseling course. For most cases, with Lewis Legal Services, only a part of the attorneys fee must be paid upfront ($0 upfront for qualified debtors). The bulk of the remaining attorney fee and the Trustee's fee is made during the repayment plan which itself may range from 36 months to as long as 60 months.

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2010-2012 © Indianapolis Bankruptcy Law Office of Eric C. Lewis

Lewis Legal Services, P.C. is a federal debt relief agency that helps people file for bankruptcy relief.