The more common type of Bankruptcy that people are familiar with is a Chapter 7 Bankruptcy. In a Chapter 7, you are telling the Court and your Creditors that you have no money leftover after you take care of your ongoing expenses to cover any debt payments. From there, you are authorizing the Court to liquidate your non-exempt assets and distribute those funds (if any) to the creditors. Once that has been completed, the Debtor receives a Discharge. The entire process on a normal Chapter 7 case lasts approximately 3-4 months.
Alternatively, Chapter 13 has an entirely different process than that of a Chapter 7. The end result, a Discharge, is essentially the same. However, the protocol on how to get to the Discharge drastically varies from a Chapter 7 to a Chapter 13. In a Chapter 13, you enter into a Court administered payment plan that generally lasts anywhere from 3 to 5 years. Upon completion of your payment plan, you are then eligible to receive a Discharge. So why would somebody choose to file a Chapter 13 over a Chapter 7?
- Fail the Means Test: In order to file for Chapter 7 Bankruptcy relief, debtors are required to complete the Means Test (there are rare circumstances where a person can bypass the Means Test). The Means Test is a standardized test wherein a Debtor is required to input their prior 6 months of income and use those numbers to determine whether they have disposable income remaining after going through certain deductions. Thus, if your income is too high, it is possible that you fail the test and if so, you are not eligible to file Chapter 7.
- Disposable Income Too High: When filing for Chapter 7, you are required to show the Court a budget (Schedule I and Schedule J) to predict the next 12 months. In this budget, you will project your income. Moreover, you will project your expenses on a monthly basis. If the difference in those two numbers (projected income – projected expenses) is too high, the Court will not allow you to file for Chapter 7. For example, let’s assume your projected income is $4,200.00 per month and your projected expenses are only $2,200.00. That leaves a positive remaining amount of $2,000.00 per month. The Court’s thought process at this point would be “If you have $2,000.00 left over each month, why are you filing Chapter 7 and not Chapter 13?”.
- Don’t Want to Risk Losing Assets: In a Chapter 7 filing, you are authorizing the Court to liquidate your un-protected assets. Anything that’s un-protected, the Court is allowed to liquidate and use those funds to pay the creditors. Sometimes a Debtor does not want to give up a certain un-protected asset. To avoid having the Court liquidate that specific asset, the Debtor can instead decide to file Chapter 13 and enter into the 3-to-5-year payment plan. In Chapter 13, the Court will not liquidate any assets.
- Pay Taxes: There are certain types of debts that aren’t eligible for Discharge by filing for Bankruptcy. Certain tax debt falls into that category. For example, if you owe $12,00.00 in taxes for the last 2 years, that would not be eligible for Discharge in your Bankruptcy case. Thus, you can instead file Chapter 13 Bankruptcy to resolve that tax obligation. You would be allowed to pay that tax debt in your Chapter 13 Plan. In the above example of $12,000.00 of tax debt, you would be able to designate $333.33 per month for 3 years to go towards paying that debt off.
- Stripping a Junior Lien: In a Chapter 13, you are potentially able to strip a 2nd Deed of Trust from your home. Please refer to the following example: You own a home that is valued at $500,000.00. You have a 1st mortgage with a current balance of $525,000.00. You also have a 2nd mortgage on your home in the amount of $75,000.00. By filing for Chapter 13, you would be able to file a Motion to Value Collateral. The purpose of this Motion would be to prove to the Court and the lender that the home is underwater (i.e. has no equity) by just factoring in the 1st If you do this, the Court would issue an Order granting your motion. You would then file this Order at the County Recorder’s Office. Assuming you successfully complete your Chapter 13 case, the 2nd mortgage lender would be required to reconvey that lien. Once that is done, now you only have the 1 mortgage secured to your property---not 2. Furthermore, since you received a discharge in the Chapter 13, you no longer owe any money on that 2nd mortgage. You just increased your home equity by $75,000.00!
- Reducing Amount Owed on a Car Loan: This is commonly referred to as a “cram-down”. Again, let’s explore by this looking at an example: You have owned a car for at least 910 days. This car at the time you file Chapter 13 has a fair market retail value of $14,000.00. The balance on the car loan is $20,000.00 at the time of the filing. In this specific example, you would be allowed to file a Motion to Value Collateral. In this Motion, you would be proving the retail value of the vehicle, the loan amount, and the fact that you have owned the vehicle for at least 910 days. If you are able to do this, now the car loan is “crammed down” to $14,000.00. Thus, you would only be required to pay the secured claim in the amount of $14,000.00 in the Chapter 13 to pay it in full. The remaining $6,000.00 gets put into the same category as your general unsecured debt, paid just as they are, and ultimately discharged when the case is completely. You just knocked off $6,000.00 (plus the interest on that amount) from your car loan!
- Save Your House: One of the most common reasons to file for Chapter 13 relief is to save a home from being foreclosed on. If you fall behind on your mortgage payments, the lender would eventually be able to foreclose on your property (i.e. take it from you). However, you can file for Chapter 13 relief to protect yourself from this. Let’s take a look at this example: You own a house and the monthly mortgage payment is $1,750.00 per month. You had a financial hardship over the past year and missed 10 mortgage payments. Without factoring in late fees, you are now $17,500.00 delinquent on your mortgage payments. The lender filed a Notice of Default and waits the required 3 months. They have demanded the entire $17,500.00 be paid or threaten a foreclosure. You don’t have that much money on hand. The lender then sets a foreclosure sale date 3 weeks into the future. Now, you can save this home by filing for Chapter 13 Bankruptcy. Once you file the case, the automatic stay goes into the place and the foreclosure attempt must stop. In your Chapter 13, you can now spread the delinquent amount over a 3-to-5-year Chapter 13 Payment Plan. As long as the payments are made, the house is safe!
How Can We Help?
Our team is highly qualified in Chapter 13 and would be able to quickly and efficiently analyze your situation to determine if Chapter 13 is the best option. Our Chapter 13 Attorney has over 12 years of experience helping people who are facing financial hardships and need legal assistance.
Please call us at 916-800-7690 to schedule your free consultation with Chapter 13 Attorney Pauldeep Bains. In the alternative, click HERE and quickly schedule your free consultation to discussion your options.
We help clients in the following areas: Sacramento, Elk Grove, South Sacramento, West Sacramento, Natomas, Citrus Heights, Antelope, Fair Oaks, Gold River, Rancho Cordova, Roseville, Rocklin, Lincoln, Wheatland, Yuba City, Marysville, Woodland, Davis, and Lodi.
