What Is a Chapter 13 Bankruptcy and How Does It Work?

Chapter 13 is essentially a payment plan that you organize through the court system. Think of it as a consolidation loan with teeth. One of the foundational features of a Chapter 13 is that even though you are working on a payment plan, you do not necessarily have to pay back one hundred percent of the debt. The formula we use in Chapter 13 to determine your payment is: A) monthly net income, minus B) monthly expenses equals, C) disposable income. Whatever that disposable income number is, is what the court wants you to pay each month to your creditors. Under Chapter 13 you can choose either a three year plan or the five year plan depending on what you qualify for. That qualification is tied to your income versus the median income. On the date you file for Chapter 13 the automatic stay goes into effect.

You are protected from any collection action from all creditors. This includes foreclosures as well. You are proposing a plan to the court that allows you to cure any defaults you might have on secured debts such as car loans or home mortgages, and to bring those current over the three to five-year period and pay what you can on any unsecured debts. Whatever is left after paying on those unsecured debts at the end of your payment plan is discharged, just like it would in a Chapter 7. Another great thing you can do in a Chapter 13 is if you have tax debt, you can stop penalties and interest from accruing while you use the Chapter 13 to pay off those taxes.

If the taxes do not meet the criteria to be dischargeable, then they have to be paid in full. But, if they are dischargeable, then you would just treat them as general unsecured debt where they get discharged at the end of your payment plan. Another great feature of a Chapter 13 is if you are underwater on your house and the value of your house is less than the balance of your first mortgage, but you also have a second mortgage or maybe even a third mortgage on your house, you can actually take off the second mortgage, and potentially a third mortgage, if you meet those criteria’s through your Chapter 13 bankruptcy. To do so, you need to prove to the court that the value of your house is less than the balance of the first mortgage.

You must work out a payment plan that states what you can afford to pay over the next three to five years. That second mortgage is treated as unsecured debt. They get whatever you can pay to them through your Chapter 13 plan. At the end of the plan, the lien comes off of your house. You can actually exit a Chapter 13 in a better situation in terms of your home equity than you were when you first entered into a Chapter 13. The focus of the Chapter 13 is to help you to get back on your feet. But, because you are perceived as having a higher income as maybe someone who has qualified for Chapter 7, they want you to pay in what you can afford over the stretch of those three to five years. Some of the features of that payment plan, depending on your circumstances, may let you bring your house payments up to current status and you can save your house from foreclosure and eventually strip off that second mortgage.

It can be a very powerful tool. Another thing you can do in Chapter 13 – at least at Atlas Law Firm – is to pay your attorney fees through the plan. The only amount clients have to pay upfront is the Chapter 13 court filing fee, which is only $310. The default fee for a five year plan is $3,500. That is a pretty standard charge. It is a great advantage to pay your attorney through the Chapter 13 plan and not have to pay upfront attorney fees. What a great benefit for our clients.

For more information on Chapter 13 Bankruptcy in Minnesota, a free initial consultation is your next best step. Get the information and legal answers you are seeking by calling today.