A Chapter 13 bankruptcy is known as a “wage earners” bankruptcy. This chapter of the Bankruptcy Code provides for the adjustment of debts of an individual with regular income. This filing allows a debtor to keep property and pay debts over time, usually three to five years. You must have some sort of stable income (wages, Social Security, or stable self-employment income) to file. Anyone with stable income can file for Chapter 13 bankruptcy — in other words, you can’t make “too much money” to qualify. You may qualify for Chapter 13 even if you do not qualify for Chapter 7. Actually, Chapter 13 can be a better bankruptcy than Chapter 7 for several reasons, such as reducing vehicle debt, paying tax debt interest and penalty free, and more. As experienced attorneys at Debt Doctors of Missouri who routinely handle both types of bankruptcy, we can advise you as to which bankruptcy is best for your circumstances.

Debts in a Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, your debts are not immediately discharged. The bankruptcy law allows for the creation of payment plans with durations of 3 to 5 years. The goal in Chapter 13 is to obtain discharge of your debts upon completion of your repayment plan. Although you do pay more in Chapter 13, you are given greater asset protection in return. The same debts that can be discharged in a Chapter 7 can also be discharged in a Chapter 13. In fact, Chapter 13 can discharge some debts that Chapter 7 cannot including:

• Some marital debts, where Chapter 7 cannot;
• Can reduce secured debts on items you want to keep, like a car or household goods;
• Can erase some 2nd mortgages on your home;
• Can help you pay back tax debt interest and penalty free, making chapter 13 a tax debtor’s “best friend.”

 

Exemptions

The same exemptions apply in Chapter 13 as in Chapter 7. As stated above, Chapter 13 allows you to keep property, even if not fully protected or exempt, because you pay the value of what the creditors could have received in a “hypothetical liquidation” under Chapter 7. For example, if you own a home and the value is $100,000 and you owe $75,000, that is $25,000 in equity. Missouri law only allows you to exempt or protect $15,000 of equity. In Chapter 7, you might lose your home. However in Chapter 13, you would pay a part of the $10,000 to your creditors (let’s say you owe $25,000 in medical and credit card debt), and the balance of $15,000 of debt would be erased or discharged at the end of your repayment period under Chapter 13.

Keeping Secured Debts and Property

In a Chapter 13, you do not reaffirm secured debt. Instead, you reorganize the debt’s repayment. For most homes, your monthly payment is not affected. You continue to pay the regular monthly payment like nothing ever happened. For automobiles, the payment can be reduced to the value of the vehicle if you owned your vehicle for more than 2.5 years. For example, say you owe $15,000 on a vehicle worth $10,000. In Chapter 7, if you want to keep the vehicle, you will have to reaffirm or keep the entire $15,000 debt. In Chapter 13, you reorganize the debt to pay only $10,000 to keep the vehicle. Chapter 13 also almost always reduces high interest rates on vehicle loans.

Tax Consequences of Chapter 13

The discharge of debt is not taxable. Consult a tax professional for further details on your specific situation.

How Your Monthly Payment Plan is Determined

In a Chapter 13 case, you will have to make monthly payments toward what you can afford to pay to your creditors, not what you owe. Debt settlement companies compute your payment to them based on what you owe. We compute your Chapter 13 payment based on what you can afford. For example, if you owe $20,000 in credit card debt, debt settlement may require $500 per month to settle or pay off the debt. If you can only afford $100 per month, that is all you will pay in Chapter 13. If you owe $50,000 in credit card and medical debt, debt settlement might require you to have to pay $1,000, based on what you owe. Again, in Chapter 13, if you can only afford to pay $100 per month, that is all you pay.

The Determination of How Much You Can Afford to Pay

Our team will work with you to develop a budget and show the Court what you really can afford and still have enough money on which to live. As experienced bankruptcy attorneys, we have helped thousands of people develop realistic budgets they can live on, and these budgets are accepted and approved by the Court. Many inexperienced or less-experienced attorneys will have you paying too much for your monthly Chapter 13 plan payment. They do not know all the factors that go into developing a successful budget. That is why the national completion rate for Chapter 13 cases is 33-50%. Our success rate for completion of Chapter 13 cases is over 85%. Some cases do not go through for reasons beyond everyone’s control. But we have helped thousands of people erase or reduce millions in debt, and we can help you.

Paying the Balance of Your Attorney Fees Through the Plan

One of the best things about Chapter 13 is that when your case is filed, the balance of any remaining attorney fees can be paid from your monthly plan payments interest free. Additionally, as work is done on your case during the duration of your bankruptcy, any fees for new work that you need, such as Court permission to refinance a home or buy a newer car, can be financed through your plan payments. This allows you to receive the legal services you need in your case without coming up with more money and without fear of losing your case and not getting your debts discharged.  

Length of Chapter 13 Payment Plans

Under the law, a Chapter 13 plan of repayment can last from three to five years. The time is based on many factors and is individually determined for each filer. The best way to determine the length of your plan is to contact our office to talk  with one of our Springfield Chapter 13 attorneys in a free office consultation.  

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