Chapter 13 bankruptcy is a Debt Reorganization Plan. It is like throwing all of your debt into a box, and then it’s paid out to one person, known as a Chapter 13 Trustee, who disburses your payments.
A common question is why would I need to file a chapter 13 bankruptcy instead of chapter 7?
The first reason is to stop the Student Loan collectors from garnishing your wages. Student loans are paid through a plan that can last up to five years. They are forced to accept the amount we calculate is their share per the plan. It holds them at arm’s length for 5 years and paying them something. Also penalties and late fees stop, however, interest still accrues. A Chapter 13 Bankruptcy can free your life for 5 years as you try to determine a permanent settlement.
The second and most common reason consider filing for chapter 13 bankruptcy instead of chapter 7 bankruptcy is having too high of an income to qualify under the means test, which is required to qualify to file for Chapter 7 bankruptcy. While you may feel that you need or at least want to file Chapter 7, making a little too much money can disqualify you from filing this type of bankruptcy. The other way you can be forced to file Chapter 13 debt reorganization is if your income exceeds your expenditures. It would take an analysis from a bankruptcy lawyer to learn if this is a factor.
The Means Test is a government calculation, which is allegedly supposed to be a bright line test. The government calculation is based on your income and IRS created living expenditures depending on family size, then create a determination of Chapter 7 and Chapter 13. The Means Test is a calculation using the financial information and expenditures, it’s designed to determine based on your income or means, whether you should be able to qualify for Chapter 7 bankruptcy. However, just because you may have a little too much income to qualify to file for chapter 7 bankruptcy, that does not mean that you are not eligible to file bankruptcy altogether. This is one of the cases where chapter 13 bankruptcy may be the best option for you.
In addition to having too high of an income to qualify to file for chapter 7 bankruptcy, a common situation where filing Chapter 13 is considered is if you are behind on your house payment, want to keep your home, and are unable to catch it up to date by the time you will file bankruptcy.
Filing for Chapter 13 bankruptcy allows you to throw the arrearage, or the amount that you’re behind on the house, into the chapter 13 repayment plan, and the mortgage company will be paid the same way as your other debtors by the Chapter 13 trustee. At the end of the plan, your mortgage will be current and since the remainder of your other unsecured debts get discharged, you should be able to afford to make the monthly payments.
For example: if your house payment is $1000, and you’re behind $3000. The $3000 would go into the chapter 13 debt repayment plan, the $1000, which is your regular payment, would also go into the chapter 13 plan, so the trustee would essentially be distributing the $1000 of your regular house payment, plus a very small minimum payment, probably $50 a month or so, on the $3000, if this plan should run for 60 months (Chapter 13 repayment plans are set up to last from 3-5 years).
It is very important to understand that, even if you do not qualify to file for chapter 7 bankruptcy due to your income, or you are behind on your mortgage payment and want to save your house, filing chapter 13 bankruptcy can help you save your house, your car, and your dignity.