For those with serious financial problems, a chapter 13 bankruptcy may be the best solution. Chapter 13 bankruptcy benefits are relatively unknown and are often misunderstood.
Some of these potential benefits are listed here with short explanations. If you live in Arizona, have serious debt problems, and have a steady income, you should speak to a bankruptcy attorney about any of the following that catches your eye.
1. Stop foreclosure and catch up mortgage arrears over time
Foreclosure rates in Arizona are climbing. Chapter 13 bankruptcy stops foreclosure and provides a mechanism for the filer to bring current any arrears over three to five years. The mortgage arrears are paid as part of a monthly payment to the chapter 13 trustee. As long as the chapter 13 plan proposed is viable and approved by the court, and the plan payments and normal house payments are made, nothing happens to the home.
2. “Strip down” mortgage
If the home’s value is less than or equal to what is owed on the first mortgage, chapter 13 can be used to change the second, third etc. mortgage(s) into unsecured debt which doesn’t necessarily have to be paid in full, thereby reducing the overall house payment. The legislation is being considered right now, that may allow certain filers to “strip” the home down to its actual value, cramming down both mortgages. Continue visiting this blog to stay updated on this issue.
3. Protect non-exempt property
A Chapter 13 plan makes it possible for the filer to keep property which would be lost in chapter 7. Much of which average consumers own, is protected by statute and doesn’t need to be protected in chapter 13. You can review the current Arizona bankruptcy exemptions here.
For those items that aren’t protected, the filer must be able to pay the value of the asset during the plan length period in monthly installments, or the asset could be surrendered for distribution to creditors much like in chapter 7.
4. Co-Debtor Protection
11 U.S.C. Section 1301, may stop a creditor from going after the co-debtor on a consumer debt, during the plan period.
5. Selling Property
If an asset is vulnerable from creditor attack, a chapter 13 bankruptcy filing will provide the asset owner some breathing room. It stops the creditor and under 11 U.S.C Section 1303 provides the filer the right to sell the property under section 363 of the code. This allows for the control of the sale of the asset. This control may result in a better sale price.
6. Stop the Repossession of a Car and “Cram” it down
Filing bankruptcy stops the repossession of a car and may even allow the filer to re-obtain a car already repossessed. If the car is one the potential chapter 13 filer wishes to keep and it is worth much less than what is owed, the car may be “crammed” down as well. This means that the filer may be able to pay only the lesser value of the car, not the total amount owed through the chapter 13 plan. Any remaining debt would be treated as unsecured debt, partially paid through the plan and/or wiped away at the end of the plan IF the car was purchased more than 2.5 years before filing.
As a side note, the filer is also able to “cram down”, non-purchase money claims and purchase money claims that are older than 1 year. He or she can also potentially cram down a vehicle purchased for someone other than the filer as well.
7. Unsecured debt is frozen
Most chapter 13 plans propose to pay a percentage of what is owed to unsecured creditors. Not only do many of these plans “cram” down the amount paid in principal to unsecured creditors, but they also stop the growth of interest and fees. Sometimes it is worth filing for that reason alone.
Some filers pay the chapter 13 trustee, attorney, secured debts for auto(s) they want to keep, arrears on home, priority child support arrears and priority taxes and discharge all else.
As an example, a recent chapter 13 client in our office was able to successfully propose to pay roughly $5000.00 of $150,000.00 in unsecured debt over the plan term, his car loan, trustee fees and most attorney fees and the remainder will be wiped away at the end of the plan.
I think that the fact that the filer is NOT necessarily paying back all of the unsecured non-priority debt is one of the most misunderstood aspects of chapter 13 bankruptcy.
8. Chapter 13 is great for those with sincere desire to repay some of the debt
Many with debt problems cannot avoid bankruptcy despite the fact they don’t want to file. For those with a steady income, and a desire to try and pay back some of what they owe, a chapter 13 bankruptcy is often the answer. It allows the filer to try to pay at least some of the debt. For many, it is seen as the honorable thing to do. A number of our clients through the years have insisted on using chapter 13, even if they otherwise qualified for a chapter 7 bankruptcy.
9. The Chapter 13 case allows for more control of consumer claims
The filer of chapter 13 can control all consumer claims in the case. He or she will have the standing to file what is called adversary proceedings on all pre-petition consumer claims like violations of the fair debt collections practices act that occurred prior to the filing date. He or she can litigate any violations of the automatic stay or discharge violations by the creditors including the misapplication of payments and improper fees by mortgage servicers. Most adversary proceedings provide for fee-shifting statutes that require the creditor to pay the filer’s legal fees when they lose.
10. More lenient debtor education course timeline
The second education course taken post-filing must be completed within 45 days of the first meeting of creditors in a chapter 7 bankruptcy. In chapter 13, it must be completed before the final plan payment.
11. Dischargeability bar dates transfer
Sometimes people file a chapter 13 case and then “convert” or change it to a chapter 7 case later. The dischargeability bar dates for adversary proceedings which must be filed in the chapter 13 case by creditors transfer over to the chapter 7. So if the adversary proceeding is not filed within 60 days of the first 341 date in the chapter 13 asking, for example, that a particular debt not be discharged, it will be barred in chapter 7.
12. A chapter 13 plan is amendable and modifiable
A chapter 13 plan can be amended and modified with the changing financial conditions of the filer. This makes it relatively flexible on route to obtaining a discharge.
13. Chapter 13 bankruptcy can be used as a vehicle to pay non-dischargeable tax debt
It is often the case that an IRS installment agreement or offer in compromise leaves the taxpayer in a worse monthly position then they would be if they filed a chapter 13 bankruptcy and paid the non-dischargeable tax debt through the plan. The amount the IRS is paid monthly is controlled by bankruptcy law. This allows many taxpayers with serious tax debt, to stop tax collection activity, and devote all extra income to paying off the debt while potentially discharging other unsecured non-priority debt at the same time.
14. The automatic stay and Chapter 13 bankruptcy
The automatic stay period is much longer than in a chapter 7 bankruptcy and provides the debtor with more opportunity to reorganize his or her financial affairs.
15. Debts incurred to pay tax debt
Debts that are incurred to pay non-dischargeable tax debt, think…using a credit card to pay the tax bill…are NOT dischargeable in chapter 7 but ARE in a chapter 13 bankruptcy.
16. Older income taxes are dischargeable in 13
Income tax debt that meets certain criteria are dischargeable both in chapter 7 and in chapter 13.
17. Non Domestic Support divorce obligations are dischargeable
Property settlement agreement related debt is NOT dischargeable in chapter 7. There is no need for the non-filing ex-spouse to bring that fact to the attention of the Court as well. These debts are often handled better with a chapter 13 bankruptcy in which they are treated as dischargeable debt.
18. Separately classify debt in chapter 13
The filer may be able to separately classify non-dischargeable debt in a 13 and repay the debt in full.
19. Income test may be easier in chapter 13
Child support income is not included in the income calculation that determines the ability to pay unsecured creditors in chapter 13, but it is in chapter 7.
Reasonable and fixed 401k contributions and 401k loan repayment amounts aren’t either.
20. Chapter 13 allows the filer to deal with back family support obligations
Chapter 13 can be used as a vehicle to get control and pay in full child support and spousal maintenance obligations that have fallen behind.
21. Protect property
Many bankruptcy filers have given assets or money to family or friends prior to filing, or paid debt owed to them prior to filing. In chapter 7, the court may order those families and friends to return those assets or funds. A chapter 13 bankruptcy may be crafted in such a way that those funds are protected.
22. Assets received after filing not lost
In a chapter 7 proceeding, money received from an estate either via intestacy, will or insurance policy may be lost. Chapter 13 provides more flexibility. If money is received sufficient to deal with the debt outside of bankruptcy the case can be dismissed.
23. No money to pay attorney fee for a chapter 7 bankruptcy?
As you may have already caught, attorney fees in a chapter 13 bankruptcy can be built into the plan and paid over time interest-free.