Chapter 13

The Rule No. 1 of bankruptcy is to DISCLOSE all the information the bankruptcy court asks you to DISCLOSE.

Overview: Unlike Ch. 7, this chapter requires a debtor to make some payments to creditors, usually over a period of three to five years. It’s similar to debt settlement plans that may be negotiated outside bankruptcy. The monthly payment depends on debtor’s income level, secured creditor payments (e.g., mortgage), but it’s not unusual for unsecured creditors (e.g., credit card companies) to receive 1% of the amount owed, although it’s frequently much higher than that. Debtor typically keeps all the property. Most frequently debtors choose this plan in attempt to keep the home, car or similar essential items that may not be protected in Ch.7 bankruptcy. It also may be possible to eliminate liens such as mortgages which are not secured at all, e.g., when the house value has dropped below the amount of the first mortgage or value of a car is lower than the balance due. A Ch. 13 plan also allows for tax debts to be paid over the life of the plan. While a plan is in effect the creditors cannot pursue debtor for payment.

Only individuals are eligible for Ch. 13 plan, business entities, such as partnerships or corporations may not use this plan.

How much do you pay?

1. Liquidation Test - The minimum amount unsecured non-priority creditors (e.g., credit card companies) must receive is the amount they would receive if this were a Ch. 7 and all the assets were liquidated (sold), after deducting the amounts exempted and administration expenses. Say you owe $300,000 in credit card debts. The liquidation test shows that the amount remaining is $20,000. This is the unsecured non priority creditors would receive over the life of the plan, typically 3 to 5 years.

2. Priority Debts, e.g. income taxes, property taxes, child support, spousal support need to be paid in full during the life of the plan.

3. Best Effort Test - This test requires you to calculate the amount of disposable income based on the average income of the six months preceding the month the bankruptcy is filed. Social Security income is not counted. The six month average income is reduced by allowances for expenses based on the IRS tables and depends greatly on the family size. The timing of the bankruptcy filing may be critical here if you expect a big change in income, e.g., a layoff could drastically reduce the amount of income available to creditors. An upcoming reduction in income would argue for delaying the filing in order to reduce the six month average income.

The highest number of the three tests is the amount creditors must receive through the plan.

Secured debts: car loans, mortgage arrearages, perfected judgment liens may be paid through the plan or outside the plan, but they cannot be voided.

Lien Avoidance

Car loans: Cars depreciate very fast. If certain timing requirements are met, the amount of car loan can be reduced to the market value of the car at the time of filing bankruptcy. This may drastically reduce the debtor’s monthly car payments.

Mortgages: In many cases mortgages are modified in the early stages of the plan and the payments may be made directly to the mortgage holder. It may also be possible to eliminate the junior mortgages (second, third, etc.) when the real property is worth less than the balance of the first mortgage. In some areas real estate values have dropped by over 50% and as much as 75%. Say you had the first mortgage balance of $500,000 and the second of $200,000. The house value is $350,000. One files a motion with the court to remove “strip” the second mortgage lien as it is totally unsecured. It’s like receiving a $200,000. gift tax free

Real Property In Bankruptcy, Foreclosures, Mortgage Modifications, etc.

A large majority of debtors want to keep the house they have been paying the mortgage on for a while, have made significant down payments on or just don’t want to move. Bankruptcy filing stops foreclosures and any debt collection by means of an “automatic stay”. This means that the mortgage company cannot sell you house unless the court approves, i.e., give them a “relief from stay”. The stay is may be lifted (removed) if proper showing is made. Mortgage companies will often move (ask) the court for a Relief From Stay (to give them the right to sell the property).

Whether the court grants (gives) them this relief (right to sell) depends on several factors.

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