When would someone want to file Chapter 13 bankruptcy?
You would file a Chapter 13 bankruptcy if you do not qualify for a Chapter 7 bankruptcy. For example, you may not be able to file a Chapter 7 if your income is too high, if you have too much equity in a home, car, bank account and so on, or if you filed a previous Chapter 7 less than 8 years ago. Your attorney would be able to tell you if you qualify for a Chapter 7 or not.
You may also want to file a Chapter 13 if you are trying to save a house or car because you have fallen behind in your payments, or if you need to pay the IRS or past due child support or alimony payment.
What are the Chapter 13 pre-filing requirements?
You will need to provide the pay check stubs you received 60 days prior to filing, the last 4 years of federal income tax returns, take a credit counseling class (typically over the phone or internet), pay the filing fee and credit report fee (currently set at $313.00 and $30.00 for each).
You also need to provide all of the necessary information needed to fill out your paperwork (“the petition”), which you will have to review and sign.
Chapter 13 Bankruptcy questions answered in this video
What is the automatic stay & is it automatic in a Chapter 13?
The automatic stay grants you a shield that protects you from direct contact from collectors and collection proceedings. It puts a pause on debt collections, phone calls from creditors, court cases, foreclosures, and tax redemption dates to name a few.
The automatic stay is not automatic in a chapter 13 bankruptcy in one instance, which is when you have had two previous bankruptcies that have been dismissed in the last year, and are now trying to file a third. In that case, we would file a motion to “impose” the automatic stay and let the Judge know why the stay needs to be applied in this case. Essentially, that the wrongs of previous cases have been made right.
What percentage is paid back in a Chapter 13?
The percentage paid back is determined in a few ways. These can be by a person’s income or their amount in assets is the most common way. Most bankruptcy cases will be required to pay back at least 10% of their overall debt to a majority of their creditors.
How do I pay the Trustee?
The Trustee can be paid in a few ways. The most typical method is a payroll control order. The payroll control order allows your monthly bankruptcy payment to be directly deducted from your actual paycheck, with your permission. The Trustee also offers e-payments to be made via their website. You may also mail in certified funds in either cashier’s check or Money order to the Trustee each month.
Do creditors object to my reorganization?
Creditors can object to the reorganization. These objections typically are to make sure the amounts that are being paid back to the creditors is accurate. If the objection is raised, then your attorney will address that objection to make sure it is resolved, and your case can proceed forward. An objection to a plan reorganization is usually a speed bump rather that ending the case.
Do I keep all of my property in a Chapter 13?
Chapter 13 allows a debtor to retain all of their property if the debtor chooses to keep their property. Chapter 13 plans include the value of non-exempt property in your monthly payment.
What if I need to apply for credit after filing?
Depending on the type of credit you are applying for, you will need court permission to obtain it. For example, if you would like to purchase a home or a car while in your case, the court will require that a motion be filed with the court. Your attorney will do this for you. You typically do not need court permission to obtain a credit card. However, any debt you incur after the bankruptcy is filed, is not included in your bankruptcy and will have to be paid directly by you.
Can I get out of the case before it concludes?
A Chapter 7 or Chapter 13 bankruptcy are both voluntary and can be dismissed in some situations.
A Chapter 13 requires a motion to be filed and it should be granted easily because you are making payments to the court and no longer wish to do so. If a motion to dismiss is granted in this Chapter you may not be able to refile for 6 months.
A Chapter 7 bankruptcy also requires a motion with the court, but it may not be granted. If it comes to light that you have an asset that is worth more than your exemption to protect it, the trustee may insist that the asset be sold to pay your creditors back. The court would not allow you out of your bankruptcy in this case. This is one reason why you should consult an attorney before filing a Chapter 7, as you may lose your home, car or cash if you file.
Chapter 13 Bankruptcy Overview
Chapter 13 is a form of bankruptcy protection whereby a person reorganizes his debt, by paying through a Chapter 13 Trustee all of his disposable income over a three to five year period of time. In many cases, creditors will receive less than a 100% repayment on their debt. To qualify for Chapter 13 bankruptcy, you first must be an individual. Further, you must have monthly income which exceeds your monthly expenses in order to fund a plan. The most common use of a Chapter 13 bankruptcy case is to repay mortgage arrears over time. Chapter 13 will stop a foreclosure case and allow a debtor to reorganize the arrearage, provided the foreclosure case has not yet proceeded to a Sheriff’s sale. If this were to occur, Chapter 13 will not provide a remedy to undue that sale. However, there is often a long time frame from the commencement of a foreclosure case until the time it is actually sold at auction. Another common use of Chapter 13 bankruptcy is to reorganize other secured debts such as vehicles. A financed vehicle can be reorganized through a Chapter 13 bankruptcy filing which could likely lower the monthly payment being paid by the debtor. In some cases, the vehicle finance company will receive less than what is owed on the contract. In any event, the debtor can continue to own and operate the vehicle provided that timely payments are made to the Chapter 13 trustee. Lastly, all other debt can be reorganized through the use of a Chapter 13 bankruptcy case. It will stop collection efforts, lawsuits, garnishments and foreclosures. It basically provides a means for a debtor to repay all or a portion of his debts over a three to five year period of time.
Advantages of Filing a Chapter 13 Bankruptcy
The number one reason in my opinion to file a Chapter 13 bankruptcy is to save a home that’s in foreclosure. Chapter 13 will allow you to repay the mortgage arrearage, the part that you fell behind, over the next 3 to 5 years while being allowed to make your regular mortgage payment on time once again. What happens in many situations is someone will fall behind on their home and they won’t have the ability to catch up with one lump sum payment. However, by filing Chapter 13, the homeowner can dictate to the mortgage company how the mortgage arrearages are going to be paid back over a lengthy period of time. Most lenders, without a Chapter 13 filing, are going to demand a full payment otherwise they’re going to continue with the foreclosure. So Chapter 13 provides a mechanism for the homeowner to stay in the home, repay the debt over time and make the regular mortgage payments again. The end result is after a three to five-year period, a successful debtor maintains the home, reinstates the mortgage and is back on track moving forward.
Number two, the second major advantage to filing a Chapter 13 is to save a car that is either subject to repossession or may have already been repossessed. If you are behind on your car and you can’t make your regular payment, eventually the car is going to get repossessed. You can stop the repossession or recover a vehicle that has been repossessed by filing a Chapter 13 bankruptcy. The total amount due on the car is lumped into your Chapter 13 repayment plan. Thus, if you have a financed vehicle, you are not going to make a regular payment on that vehicle once again. The vehicle is going to be paid by the Chapter 13 trustee as a result of you making monthly payments to support that plan. In many cases, the car can be paid back at less than what is owed if it was purchased more than 2 ½ years prior to filing for bankruptcy.
In any event, the interest rate can be significantly reduced no matter when you purchased the vehicle in many cases. So saving a financed car from repossession or recovering it after it’s been repossessed and not yet sold at auction is the second major advantage to filing Chapter 13.
The third major advantage for filing Chapter 13 is to repay unsecured creditors less than 100%. We call this a percentage plan which can be anywhere from 2% to 5% to 10%, all the way up to 100% in some cases. The great thing about Chapter 13 is that some unsecured debt is lumped together giving the debtor one place to pay to reorganize that debt. Credit cards, medical bills, personal loans, past-due utility bills and debts for other types of services are unsecured debts. And unsecured debt is a debt where there is nothing that can be taken back or repossessed from the debtor when the payment is not made. Many people file a Chapter 13 to simply pay back a percentage of their outstanding debt.
Take for example someone who has $80,000 worth of credit card debt and medical debt. That person, depending upon their income and their expenses and their assets, may have the ability to pay back as little as 10% on the dollar towards those debts. What I’m talking about here is repaying $8000 over 3 to 5 years at very little interest as opposed to paying back the full amount for the next 10 or 20 years without a bankruptcy. So Chapter 13 is a great way to pay unsecured creditors a percentage on the dollar and stop some of the excessive interest.
The fourth major advantage of filing a Chapter 13 is to repay otherwise non-dischargeable debt. If someone has student loans, recent taxes, parking tickets, child support, alimony, those debts cannot be eliminated in a Chapter 7 bankruptcy. However, those debts can be reorganized in a Chapter 13 bankruptcy and paid back over a three to five-year period. Now, even if those debts are not paid back in full, the creditors are prohibited from taking certain actions during that 3 to 5 year period. So the debtor basically buys a cushion of time whereby they are making a certain amount of payment towards that debt with the knowledge that at the end of the 36 or 60 months, they are going to owe the remaining portion. What this does as a gives a debtor breathing room. It allows the debtor to survive and be able to make other payments such as rent, mortgage, utilities, insurance, and support for children. So a great advantage to filing a Chapter 13 is to repay non-dischargeable debt over a three to five-year period.
The fifth major advantage of filing a Chapter 13 is to stop the ridiculously high interest on credit cards. By filing a Chapter 13, you are agreeing to pay back either all or a percentage of the credit cards at little or no interest in many cases. Take for example the scenario earlier where someone has $80,000 worth of credit card debt at 29% interest. By filing a Chapter 13, that $80,000 with of credit card debt can be paid back as little as $8000 at no interest or very little interest depending on the case. When you talk about how long it takes to pay off the debt outside of a bankruptcy such as a credit card with a high interest rate, it makes perfect sense to not only cut the balance down in a Chapter 13 but also cut down the excessive interest. So one of the greatest advantages of Chapter 13 is to repay a portion of credit card debt with very little or no interest over a three to five-year period.
Number six reason or advantage of filing a Chapter 13 is to save your driver’s license from suspension. A driver’s license can be suspended here in Chicago for failure to pay parking tickets, failure to pay moving violations or failure to have insurance at the time of an accident. By filing a Chapter 13, you can stop the suspension from taking place because you are agreeing to repay either all or a portion of those debts over a three to five-year period. There’s only a couple ways to handle parking tickets. You can work out an installment payment plan with the city of Chicago if they are willing to do it and that will keep you off the boot list or the suspension list. The other method is to file a Chapter 13 and to reorganize that debt over a period of 3 to 5 years provided the debtor stays in the payment plan, the city of Chicago will not suspend license or report violations to the Secretary of State.
As far as an auto accident with no insurance, there’s a couple ways you can stop that. One, you can pay off the full amount but who can afford that? Two, you can make out an installment payment plan, file that plan with the Secretary of State in Springfield and continue to make timely payments. Or three, you can file a Chapter 13 bankruptcy, repay either all or a portion of the debt over the next 3 to 5 years and protect your license.
And lastly, moving violations. This is a tricky one. The state of Illinois technically should be accepting Chapter 13 payment plans and not suspending licenses. The City of Chicago can be organized and sometimes they cannot. But for the overwhelming majority of people, the suspension is due to either parking tickets or driving without insurance and Chapter 13 is a great way to reorganize those debts and to keep your license free and clear.
As you can tell, there are many advantages to filing a Chapter 13. I have illustrated some of the most beneficial ones that I know of. However, there are others, plenty of others. If you are considering filing Chapter 13, consult with an experienced bankruptcy attorney in your local area who handles 13 on a daily.
Talk to an Experienced Chicago Bankruptcy Chapter 13 Attorney
Chicago Bankruptcy Law Firm
David M. Siegel & Associates
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