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CHAPTER 13 BANKRUPTCY
Chapter 13 bankruptcy is the more complicated of the two bankruptcy chapters. It allows you to reorganize your debts. Under Chapter 13, you retain your assets. You make monthly payments to the court over a three to five year process that will allow your creditors to receive some, and on occasion all, of the money that you owe them. As a result, it is of the utmost importance that you are able to afford the monthly payment. If you miss a payment, the court will dismiss your case.
WHAT IS CHAPTER 13 BANKRUPTCY?
In Chapter 13 bankruptcy, you file a proposed payment plan that can be accepted by the court and creditors or objected to by those parties. The plan should show how you will be able to pay back the creditors in a reasonable way over the next three to five years. The amount you will have to pay back to the court depends on certain factors:
- your monthly disposable income
- the amount of assets you could not exempt that you will have to buy back over the next three to five year process
- the amount of secured debts you included in the plan that you will continue to pay
- how much you owe the creditors
- how much would the creditors have been able to collect in a Chapter 7 bankruptcy
The only aspect of a Chapter 13 bankruptcy that can keep you from filing is based on a debt limit. You are not allowed to have more than $1,1484,200 of secured debt (such as homes, vehicles, etc.) and $394,725 in unsecured debts (such as credit cards, cash advances and medical bills).
There are differences between the two bankruptcy chapters. A huge advantage of filing a Chapter 13 bankruptcy is the ability to keep secured debts where you are behind in payments. Chapter 13 allows you to make up the missed payments during the timeline of the bankruptcy. This is especially helpful to debtors who are in home foreclosure proceedings or are in the process of having their car repossessed by their creditor.
HOW WILL A CHAPTER 13 HELP ME KEEP MY HOME?
This bankruptcy chapter helps you keep your home because of its duration. The three to five year timeline of a Chapter 13 bankruptcy affords you plenty of time to catch up on any arrears owed to your mortgage company in the majority of situations. In addition, there are mortgage modification mediation programs available to you upon filing. These programs allow you and the mortgage company to work together to come to an agreement that benefits both sides.
WHY ELSE WOULD I FILE CHAPTER 13?
Outside of protecting assets, Chapter 13 is the only one of the bankruptcy chapters for individuals that tolls interest on certain debts during the timeline of the bankruptcy. Student loans and back taxes are just two examples of debts that cannot be discharged in most Chapter 7 situations. In a Chapter 13, you will save some money on interest charges during the entire duration of the bankruptcy process.
If you are in a Chapter 13, you most likely have a regular income. And in many situations, your income is considered too high for a Chapter 7. You should be able to repay a portion of your debt to the creditors through a payment plan that gets approved by the court. Some debtors file Chapter 13 because they have no other choice, as they make too much money. However, many debtors choose to file Chapter 13 because it has benefits that are not available to debtors in a Chapter 7. Some examples of these benefits include the ability to:
- catch up on mortgage payments that you have fallen behind on
- strip unsecured junior liens from your house in certain situations without having to pay anything to that creditor
Chapter 13, unlike Chapter 7, allows you to keep all of your property. In exchange, you pay back a portion of the debts you owe in a repayment plan that is approved by the court. If you do not have regular income, Chapter 13 is not the best option for you. This is because it requires you to regularly make monthly payments. If you miss a payment, your case could be dismissed.
WHAT ARE THE BENEFITS OF FILING CHAPTER 13?
YOU CAN KEEP ALL OF YOUR ASSETS
When you file a Chapter 7, it can be very difficult to keep all of your assets that you could not fully exempt with your bankruptcy exemptions. If you can’t protect your assets, you are required to either surrender the property or buy it back. This means you will be paying to keep property that you previously paid off. Many debtors are unable to do that and as a result are not able to keep their property. In a Chapter 13, you will be able to keep all of your assets. If you do have to pay the court to buy back certain assets you could not fully exempt, the timeline in a Chapter 13 makes the process much more affordable, as it is stretched out over three to five years.
Chapter 13 allows you to strip, or remove, any unsecured junior liens on your home. Chapter 7 does not allow lien stripping. Therefore, if you file Chapter 13, you can eliminate your second mortgage/home equity line of credit if it is deemed unsecured due to the amount owed on the principal mortgage.
PRINCIPAL LOAN BALANCES CAN BE REDUCED THROUGH THE CRAMDOWN PROCESS
In certain situations, you can reduce the balance on your loan to the actual market value of the property securing the loan. This benefits many people who owe more on their homes or vehicles than the actual home or vehicle is worth. Chapter 7 does not allow cramdowns.
CHAPTER 13 IS THE BETTER BANKRUPTCY CHAPTER IF YOU WANT TO SAVE YOUR HOME
A Chapter 7 can assist people in foreclosure. However, you have a much higher chance of success in saving your homes if you file a Chapter 13. There are programs that exist for home modifications that are designed to succeed when used in conjunction with filing a Chapter 13.
CONTACT US TODAY TO LEARN MORE ABOUT CHAPTER 13
At Holland Law Office P.C., Fort Collins bankruptcy attorney Steve Holland understands the need to do a Chapter 7 vs. Chapter 13 analysis with every case that comes through his door. If you are looking for bankruptcy assistance in Colorado, contact our offices today.