Chapter 13 of Title 11 of the United States Code allows a debtor to file for bankruptcy and establish a repayment plan for 3 to 5 years. During this time, the debtor must demonstrate they are receiving a regular income and make monthly payments to pay off his/her debts. Chapter 13 Bankruptcy stands out from other chapters due to some of the unique methods used to provide relief. For example, when filing under Chapter 13, debtors can eliminate his/her second mortgage entirely and not have to deal with it in the future. In addition, if you are facing a foreclosure, Chapter 13 allows the debtor to prevent a creditor from continuing any foreclosure proceedings. This gives debtors some time to recover after seeking relief. To learn more about Chapter 13, read below and contact our office by calling 916-800-7690 to speak with local Sacramento Chapter 13 Bankruptcy Attorney Pauldeep Bains.
WHAT HAPPENS DURING A CHAPTER 13 FILING?
The first step in beginning the Chapter 13 process is filing the Bankruptcy Petition and all other required paperwork with the Bankruptcy Court. These documents include a list of all of your creditors, summary of your assets, current budget, etc. A Chapter 13 case also requires for a Chapter 13 Plan to be filed. This document outlines a payment plan for debtors to repay creditors in a timely manner. After the petition has been filed, the debtor’s case officially begins, and their repayment plan is enacted.
Approximately 30 to 45 days after filing the petition, debtors attend the meeting of creditors pursuant to 11 U.S.C. § 341. Here, a court-appointed trustee is given the opportunity to question the debtor. Trustees are assigned to each individual’s case as per 11 U.S.C. § 1302. Creditors may also attend the meeting and ask questions. Generally, the trustee will conclude the hearing and not require the debtor to attend another meeting. Instead, the debtor’s attorney can attend future hearings in their place. During this time, the debtor must be following their developed repayment plan and making monthly payments to the trustee.
After the Meeting of Creditors has occurred and the repayment plan is underway, the debtor must seek approval from the Bankruptcy Judge to confirm the plan. 11 U.S.C. § 1325 provides the debtor with regulations they must follow during this time. If the trustee or creditors do not feel that the filed plan seems to be the most appropriate, they can make an objection. If any objections are filed, both the debtor and the objecting party will be given the opportunity to present their arguments to the Judge. Once the Judge has reached his/her ruling and the plan is confirmed, the debtor will continue to make payments for the remainder of the time established. After competing payments during the 3 to 5 year time period, 11 U.S.C. § 1328 allows the debtor to request the Court discharge their case.
CHAPTER 13 PLAN
The Chapter 13 Repayment Plan lays out each payment that the debtor must make to each creditor involved over the 3 to 5 year period. By 11 U.S.C. § 1322(d), a Chapter 13 plan cannot exceed more than 5 years. A 3 year plan may be enacted if the debtor’s current monthly income is less than the state median.
Below is a list of some of the general categories involved in a Chapter 13 case filed in the Eastern District of California, including the amount required for payment:
- Priority Debts must be paid 100% of the claim amount listed in the plan. The two most popular examples are tax debts and unpaid child/spousal support.
- EXAMPLE: In the previous year, a debtor owed the Internal Revenue Service $4,000 as a result of unpaid taxes, the debtor’s Chapter 13 plan requires him/her to pay the full $4,000.
- Mortgage Arrears must be paid 100% of the amount listed in the plan. An exception may be made for a solely unsecured junior mortgage.
- EXAMPLE: A debtor owes $10,000 in back payments on his/her 1st If the debtor is planning on keeping this property, he/she must pay $10,000 during the plan.
- Car loans must be paid 100% of the claim amount listed if the loan has less months remaining than the length of the plan.
- EXAMPLE: A debtor has a remaining balance of $12,000 on his/her car loan. He/she will pay $12,000 during his/her plan.
- Administrative Claims must be paid 100% of the amount listed. One of the most popular administrative claims are the debtor’s attorney fees that were not paid before the case was filed.
- EXAMPLE: A debtor still owes his/her attorney $1,000 for his/her fees. The debtor will pay $1,000 under the plan.
- General Unsecured Creditors may receive 0% to 100% of the claim listed in the plan. Examples of this include credit cards, medical bills, personal loans, payday loans, and car repossession deficiency balances. The amount owed is dependent on the debtor’s disposable income, as well as the total value of all non-exempt assets.
- EXAMPLE 1: A debtor’s disposable income determines he/she must pay the General Unsecured Creditors $200 per month. Over the time period of the plan, he/she will make monthly payments of $200 to the General Unsecured Creditors.
- EXAMPLE 2: A debtor’s disposable income determines he/she does not have any leftover money to pay the General Unsecured Creditors. The debtor will not have to make payments to the General Unsecured Creditors during the time of his/her plan.
BENEFITS OF A CHAPTER 13 FILING
Chapter 13 makes it possible for an individual to have access to several benefits that otherwise would not be available to them. The following benefits of a Chapter 13 filing include the following:
SAVING YOUR HOME
By filing a Chapter 13 bankruptcy, debtors are given the opportunity to prevent a creditor from foreclosing on your home. Instead, it will give you 5 years to catch up on the delinquency. Filing the initial bankruptcy petition allows for the Automatic Stay to come into play, pursuant to 11 U.S.C. § 362. The Automatic Stay will serve as a ban or injunction on creditors to prevent them from collecting payments or enforcing liens, ultimately preventing a lender from foreclosing your property. In order to prevent a foreclosure, debtors must pay back both delinquent and ongoing mortgage payments under his/her Chapter 13 Plan.
STRIPPING A JUNIOR MORTGAGE
Stripping a lien makes it possible for a debtor to eliminate a second mortgage from his/her home and instead equate the debt to a general unsecured debt. To do so, the debtor must first file a motion with the Bankruptcy Court pursuant to 11 U.S.C. § 506 to value the property. During this, the debtor must attempt to show the Court the actual value of the property is less than the amount owed on the mortgage. If the Court is in agreeance with the debtor, the junior lien can be treated as unsecured and ultimately “stripped,” following the same rules as other unsecured claims (i.e. credit cards). Once Bankruptcy has been completed, the creditor must remove his/her lien from the debtor’s property.
EXAMPLE: A debtor owns a home with a market value of $300,000. He/she has two mortgages, owing $400,000 for the first mortgage and $100,000 for the second. By filing a Chapter 13, the debtor will be able to “strip” the second mortgage, and the creditor will have to release the lien.
SAVING YOUR VEHICLE
With Chapter 13, the debtor is able to make adjustments to his/her vehicle plan and make payments through the Chapter 13 Plan. Since the Plan lasts for 3 to 5 years, debtors will face lower monthly payments since payments are now being made over a longer time span. Interest rates may also decrease over this time.
PAYING BACK TAXES
Bankruptcy usually considers most tax debts to be non-dischargeable. In other words, even if you receive a discharge, you are still legally obligated to continue paying off any tax related debts. However, in a Chapter 13 case, debtors have the opportunity to include any priority taxes as part of his/her repayment plan, allowing him/her to continue making payments throughout the time of the plan.
CONTINUING TO RUN YOUR BUSINESS
In a Chapter 7 Bankruptcy, trustees may require that the debtor shut down his/her business. However, Chapter 13 Bankruptcy allows for debtors to keep businesses open and continue being able to run them.
PREVENTING RISING DEBTS
A Chapter 13 filing makes it possible for debtors to reduce certain secured claims. For example, secured claims on vehicles and other personal property (i.e. furniture, electronics, etc.) can be reduced to their fair market retail value. The remaining portion of the claim is now considered a general unsecured debt, which the debtor will not be required to pay.
AVOID JUDGEMENT LIENS
Chapter 13 filings allow debtors to avoid facing any judgement liens. A judgment lien is when a creditor wins a lawsuit against you and attaches that lien to your property, giving creditors a possession on the property until your debts have been paid off. The debtor has the opportunity to prove he/she is entitled to an exemption and requests the Court enter an order to prevent the lien from being placed, as per 11 U.S.C. 522(f).
HOW WE CAN HELP
Filing for Chapter 13 Bankruptcy is not a simple process. It is important to be familiar with the Bankruptcy Code and know how it can be used to your benefit, in addition to knowing the Local Rules of the Bankruptcy Court. Mr. Bains possesses both skills. Mr. Bains has been helping clients through the difficult world of Chapter 13 since 2010 and has both the knowledge and expertise to successfully navigate you through a Chapter 13.
Do not let another day go by without speaking to our office. Call 916-800-7690 to set up your free consultation with our dedicated Chapter 13 Bankruptcy Attorney Pauldeep Bains. By calling our office, you will speak directly with a Sacramento Bankruptcy Lawyer who specializes in Chapter 13 bankruptcies. You will continue to deal directly with Mr. Bains through the entire Chapter 13 process and will not be passed on to a staff member like many other offices will do.
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, Folsom, El Dorado Hills, Lincoln, Wheatland, Yuba City, Marysville, Woodland, Davis, and Lodi.