Chapter 13 Bankruptcy

In a Chapter 13, you must pay back Creditors, within five years, in full or in part to the best of your ability and you must pay as much as a Chapter 7 would have paid if there had been a liquidation. Any Chapter 13 must always pay back at least as much as a Chapter 7 would have regardless of the state in which you live. By this, we mean if your house would have been sold in a Chapter 7 and would have paid back 20,000 dollars to your creditors, your Chapter 13 must repay at least $20,000. Each local district has its own rules.

Chapter 13 plans operate very much like bill consolidation loans, in that debts are consolidated into one monthly payment which is paid to a Trustee. The Trustee then pays the Creditors. Certain debts such as attorney fees are given super priority and are paid absolutely first. Then taxes and child support are given priority and are paid before the secured debts. After priority debts, secured debts are paid. The last debts to be paid are unsecured debts. A Trustee is an attorney appointed by the Court. He is not a judge, although he runs the 341 hearing in both Chapter 7 and 13 cases and will ask questions at the 341 hearing like a judge, but these “hearings” are actually more like depositions. The trustee does not work for you. He represents the banks and the Creditors that you owe. The Trustee’s major job is to take property from you if he can. This is how he earns his fees. Although you are required to tell the truth at the hearing, this is not the time to brag about how much your property is worth if it is worthless, and it is the time to check your titles to make certain they are properly recorded.

Secured claims are handled in one of two ways. The first, which we call the ” catch-up & maintenance ” method, is where your past due payments on secured debts are paid from your monthly bankruptcy plan payments, and payments that come due after filing bankruptcy are paid directly to the creditor (“outside the plan”). When the Chapter 13 has been terminated, you are still obligated to make any payments remaining due on the secured debts.

We call the other method the ” cram-down ” method. This method is used when either the collateral is worth less than the amount of the debt, or when the number of payments left on a debt is less than the length of the plan. The following examples illustrate the “cram-down” method. In it you can pay what the collateral is worth (not what you owe on it), stretch out the payments to 36 months, and pay a reduced interest rate. If you have a second mortgage with no equity, you can completely eliminate it. To qualify for a “cram-down” you have to have paid the purchase money for a car 910 days bfore filing bankruptcy, and for other property you must have made the first payment at least a year before filing bankruptcy.

The ability to “refinance” your secured loans through this second method permitted by Chapter 13 bankruptcy lets you reduce the monthly payments and is sometimes the only way to have enough cash flow to keep your property.

HOW A CHAPTER 13 WORKS

A Chapter 13 is a reorganization of your debt. It will stop foreclosures and the repo man in their tracks. In a Chapter 13 Bankruptcy, you will pay the Trustee all your “available” money for 5 years (generally) and he will pay your debts that are included in the Ch 13. At the end of the Ch 13, all unsecured debt that is left over is discharged. Some things can affect your discharge, such as being behind on a domestic support payment, if you have received a discharge in a case filed under chapter 7 (or 11 or 12) during the 4-year period preceding the filing date of the chapter 13, or in a prior chapter 13 filed within two years prior to filing the new case.

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