There are a few different reasons to file for Chapter 13. Probably the first one is if you are not qualifying for the Chapter 7.
Jan. 13, 2023
What Are the Requirements to Qualify for A Chapter 13 Bankruptcy?
There are a few different reasons to file for Chapter 13. Probably the first one is if you are not qualifying for the Chapter 7. If we are running the means test numbers and we are not seeing any path for you to get past the Chapter 7 means test, it pretty much puts you into that Chapter 13 category. Then we look at your monthly expenses to determine if the court is going to accept them as necessary and reasonable. One of the features of the Chapter 13 is that you are proposing a payment plan, which means it is coming under the scrutiny of the Chapter 13 trustee who might say “We think your expenses on X, Y, and Z maybe too high. Can you either prove that you need those expenses by providing the bills and explaining why that perceived higher expense is necessary for your family or can you modify that expense and bring it down, which then would result in your Chapter 13 going up?”
You hire a bankruptcy attorney to help you navigate the court system and can determine what the court finds acceptable, and areas where you can push back, and make sure that your budget works for the Chapter 13 court. The Chapter 13 court has said they do not expect people to be living hand to mouth in a Chapter 13. But there is a certain amount of belt tightening that has to take place. In my experience, by the time somebody sits down with me, they have already been doing some belt tightening.
Actually over the next five years the court says you can spend this money. You do not have to bring it all into the Chapter 13 plan. So it actually works out pretty well. It certainly works out if there is some kind of foreclosure going on. If the person was laid off from work for a few months, and was behind on their house payments, and maybe worked out some forbearance agreement with the mortgage lender that was good for six months. Maybe they just found a job again and they are starting to make the money, but now they have six months of mortgage payments that are coming due and the mortgage lender says “No, we’re not doing forbearance. You either need to bring this current now or we’re going to foreclose on the house”.
As long as we have the Chapter 13 filed before the foreclosure sale date, then the automatic stay court order that prevents collection activity is going to prevent foreclosure from going through. Then we can say “We’re going to take these six months of mortgage arrears and we’re going to pay that off over the next five years”. It is a very powerful tool for people to stay in their house and avoid foreclosure. Another set of circumstances where people are qualifying for a Chapter 7, but they have a huge second mortgage on their house because they bought their house when home values were extraordinarily high, and they took out a 80/20 first and second, and now that second mortgage, is $60,000 to $70,000, but the value of their house has dropped so much, that even if they sold it today they would not be able to pay off the balance of the first mortgage.
We can then put them in a position in a Chapter 13, with the second mortgage, while the second mortgage technically has a lien on the house, the bankruptcy court treats it as unsecured debt, because if the house was foreclosed, the second mortgage would not receive any money anyway. Because the foreclosure proceeds would all go to the first mortgage. The bankruptcy court will allow you to strip the second mortgage lien off your home and treat it as unsecured debt. Pay them what you can during your plan. Again, monthly net income minus monthly expenses equals disposable income.
Make that Chapter 13 payment every month and at the end of the payment plan, whatever is left, owing on that second mortgage gets discharged, and the lien gets taken off your home. It is an extraordinarily powerful tool that has helped a lot of people who, through no fault of their own, are in houses where they are underwater and they have to make a choice between sticking it out and hope that the market is going to go back to what it was when you bought the house. Or, do you go through a Chapter 13 bankruptcy to basically pay that second mortgage and pay what you can over a three to five year period?
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The three common triggers for bankruptcy are unemployment, medical expenses, and divorce. Unemployment can trigger bankruptcy, which is pretty straightforward.
The trustee has a duty to conduct due diligence, and that basically means reviewing the documents that are filed by the debtor and then holding a hearing called a Section 341 hearing in which the trustee asks some standard questions of the debtor.