Chapter 13 Bankruptcy

Chapter 13 personal bankruptcy is available for:

• Individuals

• Married couples

• Married people who want to file without their spouse (this is possible)

People who own businesses, such as a sole proprietorship, LLC, or corporation, can also file for personal Chapter 13 bankruptcy.  Chapter 13 is not available for businesses (click here to find out more about business bankruptcy).

Chapter 13 is not available to anyone whose unsecured debts are more than $336,900, or whose secured debts (including investment homes) exceed $1,010,650.  If your debts exceed either of those levels, then your only options are Chapter 7 or Chapter 11.  On the other hand, if your debts exceed those levels, then often your debt is primarily business debt, and, if so, then we can qualify you for a Chapter 7 regardless of your current income level.

What is Chapter 13?

When someone files for Chapter 13 bankruptcy, their aim is to have the opportunity to repay some or all their debts under the safety of a court-ordered plan. Unlike Chapter 7, which involves liquidation of non-exempt assets, this process allows the debtor to use whatever income they may have in the future to pay off the creditors.

Chapter 13 acts like a debt consolidation loan under which the individual makes the plan payments to a Chapter 13 trustee, who then distributes payments to creditors.  Individuals have no direct contact with creditors while under Chapter 13 protection.

Under Chapter 13, debtors propose a repayment plan to make installments to creditors over three or five years. If the debtor's current monthly income is less than the applicable state median, the plan will usually be for three years.  If the debtor's current monthly income is greater than the applicable state median, the plan generally must be for five years.  The entire process, including the payments made during those 5 years, is carried out under the supervision of the courts, which means that Chapter 13 debtors are in bankruptcy for the entire period, and the discharge of debts only comes at the end of the term.

What are the Advantages of Chapter 13?

Chapter 13 offers a few advantages over Chapter 7.  Perhaps most significantly, Chapter 13 offers delinquent homeowners an opportunity to save their homes from imminent foreclosure. By filing Chapter 13, individuals can immediately stop foreclosure proceedings and are provided a court-approved opportunity to cure delinquent mortgage payments over time.  The tricky part is that, after filing, a Chapter 13 debtor must begin paying, on time and in full, all subsequent mortgage payments that come due after the date of filing.  This requirement can reduce the attractiveness of Chapter 13 versus Chapter 7, because if debtors could afford their monthly mortgage payments, then usually they would not be facing imminent foreclosure.

Chapter 13 also permits people to eliminate a second mortgage from their home.  This option is not available under Chapter 7.  Under Ninth Circuit law, this "lien strip," as it is called, can only occur if the debtor can prove (through an appraisal) that the property is valued less than the amount of the first mortgage.

Who Can File for Chapter 13?

In short, Chapter 13 is for individuals whose regular income levels are high enough that they cannot qualify for Chapter 7.  It also can be used by lower-income persons who are significantly behind on payments, but who have equity in their homes and do not wish to lose it in a Chapter 7 filing.  A corporation or partnership may not be a Chapter 13 debtor.

Any individual, even if self-employed or operating a sole proprietorship, is eligible for Chapter 13 relief as long as the individual's unsecured debts are less than $336,900 and secured debts are less than $1,010,650.  If debt levels are higher than either of those thresholds, and they cannot qualify for Chapter 7, then the individual will need to file under Chapter 11.

An individual cannot file under Chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens.

A husband and wife may file a joint petition or either may file an individual petition.

How Does Chapter 13 Work?

Although several steps are involved in Chapter 13 cases, the process is rather straightforward.  For a detailed overview of the components, click here (pdf).

In a Chapter 13 bankruptcy, debtors are allowed to keep all of their property, in contrast to a court-ordered liquidation / forced sale under Chapter 7.  This factor is the most attractive thing about Chapter 13: it allows you to keep your property especially your home and car which might otherwise be lost, so long as you make timely payments going forward.

The central part of a Chapter 13 case is filing a plan showing how, over the next three or five years, you will pay off some of your past-due and current debts.  This written plan is created giving details of all the transactions that will occur, and their duration. These payments include regular monthly mortgage payments and an amount sufficient to pay off the your car, along with some payment to your unsecured creditors.  You will also be required to pay off any priority claim such as back taxes, child support and certain other types of debts. The repayment must begin within thirty to forty-five days after the case has started.

If a debtor manages to complete all necessary payments in the plan, he/she is given a full plan discharge.

How Much Does Chapter 13 Cost?

Relative to other bankruptcy firms, our fees are about average. For complex cases, we will charge more, depending on the complexity of the case. Please call us to discuss your situation and obtain a firm quote.

Note that most of the fees will be paid as part of your Chapter 13 plan.  Those fees paid through the plan do not change your plan payment amounts due; it only reduces the amounts ultimately distributed to unsecured creditors.  In other words, you won't pay up front for most of the cost.

If you are not sure whether Chapter 13 or Chapter 7 bankruptcy is right for you, please call us for a free phone consultation.