|
Chapter 13 - The Repayment Plan
Your Obligations Under a Chapter 13 Bankruptcy Plan
Learn which debts you must pay back when you file for Chapter 13 bankruptcy.
To begin a Chapter 13 bankruptcy, you fill out a packet of forms -- mostly the same forms as you would use in a Chapter
7 bankruptcy -- listing your income, property, expenses, and debts. You file these forms and paperwork with a nearby bankruptcy
court. You must also file a workable payment plan proposing how you plan to handle your debts over the payment plan period.
You must also file your tax return for the previous year, proof that you've filed your tax returns for the last four years,
and a certificate showing that you've completed credit counseling with an agency approved by the United States Trustee (go
to www.usdoj.gov/ust, then click "Credit Counseling and Debtor Education" for a list of approved
agencies).
Under a Chapter 13 plan, you make payments, usually monthly, to the bankruptcy trustee, an official appointed by the bankruptcy
court to oversee your case. The trustee in turn pays your creditors and collects a statutory commission based on the amounts
paid out under your plan. You must make every payment, on time, in order to successfully complete your plan and get a discharge
of your remaining debts.
How Much You'll Have to Pay
Some creditors are entitled to receive 100% of what you owe them, while others may receive a much smaller percentage (or
nothing at all). Typically, Chapter 13 bankruptcy plans must provide that:
Administrative claims will be paid 100%. These include:
- your filing fee ($274)
- the trustee's commission (3% to 10% of each monthly payment), and
- attorney's fees, if you hire an attorney for help with your Chapter 13 bankruptcy.
Priority debts will be paid 100%. These include:
- back alimony and child support
- most tax debts (including state and federal income taxes)
- wages, salaries, or commissions you owe to employees, and
- contributions you owe to an employee benefit fund.
Mortgage defaults will be paid 100% if you want to keep your house.
Other secured debt defaults will be paid 100% if you want to keep the property. Missed car payments
fall into this category.
Unsecured debts will be paid anywhere from 0% to 100% of what you owe. The exact amount depends on:
- the total value of your nonexempt property
- the amount of disposable income you have each month to put toward your debts, and
- how long your plan lasts.
Disposable Income
Your payment plan must commit to paying any leftover disposable income (your income less certain allowed expenses and payments
on secured loans, such as a mortgage or car loan) towards your unsecured debts, such as credit card debts and medical bills.
Length of Payment Plan
The length of your payment plan depends on your income level. If your "current monthly income" (your average income over
the six months prior to filing) exceeds the median monthly income for a household of your size in your state, your plan must
last five years. If your income is less than the median, you can propose a three-year plan, even if your unsecured creditors
cannot be fully repaid during that time. (To find the median income figures for your state, go to the United States Trustee's
website, www.usdoj.gov/ust, and click "Means Testing Information.")
Your "current" monthly income might be out of date. Because your current monthly income, as calculated
above, is an average, it may well be more than your actual monthly income at the time you file. For instance, if you were
laid off unexpectedly three months before filing, your monthly income when you file may be quite low -- as compared to your
average income over the last six months, which will have to include three months of your salary.
No Surrender of Property
If you file for Chapter 13 bankruptcy, you don't have to hand over any of your property; instead, you repay your debts
out of your income. In exchange for getting to keep your property, your plan will have to pay your creditors at least the
value of your nonexempt property. (In Chapter 7 bankruptcy, you must surrender your nonexempt property
to the trustee, who can sell it and distribute the proceeds to your creditors. You do get to keep property that is exempt.)
For more information on Chapter 13 bankruptcy, see Chapter 13 Bankruptcy: Repay Your Debts,
by attorney Stephen Elias and Robin Leonard, J.D.
How Bankruptcy Can Help With Foreclosure
by Attorney Stephen R. Elias
Avoid or delay foreclosure of your home by seeking bankruptcy protection.
If you are facing foreclosure and cannot work out a deal or other alternative with the lender, bankruptcy may help.
If you get behind on your mortgage payments, a lender may take steps to foreclose -- that is, enforce the terms of the
loan by selling the house at a public auction and taking payment of your loan out of the auction.
This won’t happen overnight. The foreclosure process typically starts after you fall behind on your payments for
at least two months, and often three or four. That gives you time to try some alternate measures, such as loan forbearance,
a short sale, or a deed in lieu of foreclosure.
But if you've already tried and failed with these measures, now is a good time to consider bankruptcy as a possibility
for avoiding or stalling foreclosure. Here are some ways that filing for bankruptcy can help you.
The Automatic Stay: Delaying Foreclosure
When you file either a Chapter 13 or Chapter 7 bankruptcy, the court automatically issues an order (called the Order for
Relief) that includes a wonderful thing known as the “automatic stay.” The automatic stay directs your creditors
to cease their collection activities immediately, no excuses. If your home is scheduled for a foreclosure sale, the sale will
be legally postponed while the bankruptcy is pending—typically for three to four months. However, there are two exceptions
to this general rule:
Motion to lift the stay. If the lender obtains the bankruptcy court’s permission to proceed with
the sale (by filing a “motion to lift the stay”), you may not get the full three to four months. But even then,
the bankruptcy will typically postpone the sale by at least two months, or even more if the lender is slow in pursuing the
motion to lift the automatic stay.
Foreclosure notice already filed. Unfortunately, bankruptcy’s automatic stay won’t stop the
clock on the advance notice that most states require before a foreclosure sale can be held (or a motion to lift the stay can
be filed). For example, before selling a home in California , a lender has to give the owner at least three months’
notice. If you receive a three-month notice of default, and then file for bankruptcy after two months have passed, the three-month
period would elapse after you’d been in bankruptcy for only one month. At that time the lender could file a motion to
lift the stay and ask the court for permission to schedule the foreclosure sale.
How Chapter 13 Bankruptcy Can Help
Many people will do whatever they can to stay in their home for the indefinite future. If that describes you, and you’re
behind on your mortgage payments with no feasible way to get current, the only way to keep your home is to file a Chapter
13 bankruptcy.
How Chapter 13 works. Chapter 13 bankruptcy lets you pay off the “arrearage” (late, unpaid
payments) over the length of a repayment plan you propose—five years in some cases. But you’ll need enough income
to at least meet your current mortgage payment at the same time you’re paying off the arrearage. Assuming you make all
the required payments up to the end of the repayment plan, you’ll avoid foreclosure and keep your home.
2nd and 3rd mortgage payments. Chapter 13 may also help you eliminate the payments on your second or third
mortgage. That’s because, if your first mortgage is secured by the entire value of your home (which is possible if the
home has dropped in value), you may no longer have any equity with which to secure the later mortgages. That allows the Chapter
13 court to “strip off” the second and third mortgages and recategorize them as unsecured
debt – which, under Chapter 13, takes last priority and often does not have to be paid back at all.
Canceling debt. Chapter 7 bankruptcy will also cancel all the debt that is secured by your home, including
the mortgage, as well as any second mortgages and home equity loans.
Canceling tax liability for certain property loans. Thanks to a new law, you no longer face tax liability
for losses your mortgage or home-improvement lender incurs as a result of your default, whether you file for bankruptcy or
not. This new law applies to the 2007 tax year and the following two years.
However, the new tax law doesn’t shield you from tax liability for losses the lender incurs after the foreclosure
sale if:
- the loan is not a mortgage or was not used for home improvements (such as a home equity loan used to pay for a car or
vacation), or
- the mortgage or home equity loan is secured by property other than your principal residence (for example, a vacation home
or rental property).
This is where Chapter 7 bankruptcy helps. It will exempt you from tax liability on losses the lender incurs if you default
on these other loans.
|
