How Chapter 13 Works

In a Chapter 13 bankruptcy, you must pay back creditors, within five years, in full or in part to the best of your ability and you must pay as much as a Chapter 7 would have paid if there had been a liquidation. Any Chapter 13 must always pay back at least as much as a Chapter 7 would have regardless of the state in which you live. By this, we mean if your house would have been sold in a Chapter 7 and would have paid back 20,000 dollars to your creditors, your Chapter 13 must repay at least $20,000. Each local district has its own rules.

Chapter 13 plans operate very much like bill consolidation loans, in that debts are consolidated into one monthly payment which is paid to a Trustee. The Trustee then pays the Creditors. Certain debts such as attorney fees are given super priority and are paid absolutely first. Then taxes and child support are given priority and are paid before the secured debts. After priority debts, secured debts are paid. The last debts to be paid are unsecured debts. A Trustee is an attorney appointed by the Court. He is not a judge, although he runs the 341 hearing in both Chapter 7 and 13 cases and will ask questions at the 341 hearing like a judge, but these “hearings” are actually more like depositions. The trustee does not work for you. He represents the banks and the Creditors that you owe. The Trustee’s major job is to take property from you if he can. This is how he earns his fees. Although you are required to tell the truth at the hearing, this is not the time to brag about how much your property is worth if it is worthless, and it is the time to check your titles to make certain they are properly recorded.

Secured claims are handled in one of two ways. The first, which we call the ” catch-up & maintenance ” method, is where your past due payments on secured debts are paid from your monthly bankruptcy plan payments, and payments that come due after filing bankruptcy are paid directly to the creditor (“outside the plan”). When the Chapter 13 has been terminated, you are still obligated to make any payments remaining due on the secured debts.

We call the other method the ” cram-down ” method. This method is used when either the collateral is worth less than the amount of the debt, or when the number of payments left on a debt is less than the length of the plan. The following examples illustrate the “cram-down” method. In it you can pay what the collateral is worth (not what you owe on it), stretch out the payments to 36 months, and pay a reduced interest rate. If you have a second mortgage with no equity, you can completely eliminate it. To qualify for a “cram-down” you have to have paid the purchase money for a car 910 days bfore filing bankruptcy, and for other property you must have made the first payment at least a year before filing bankruptcy.

The ability to “refinance” your secured loans through this second method permitted by Chapter 13 bankruptcy lets you reduce the monthly payments and is sometimes the only way to have enough cash flow to keep your property.

HOW A CHAPTER 13 WORKS

A Chapter 13 is a reorganization of your debt. It will stop foreclosures and the repo man in their tracks. In a Chapter 13 Bankruptcy, you will pay the Trustee all your “available” money for 5 years (generally) and he will pay your debts that are included in the Ch 13. At the end of the Ch 13, all unsecured debt that is left over is discharged. Some things can affect your discharge, such as being behind on a domestic support payment, if you have received a discharge in a case filed under chapter 7 (or 11 or 12) during the 4-year period preceding the filing date of the chapter 13, or in a prior chapter 13 filed within two years prior to filing the new case.

What Makes a Chapter 13 Better than a Chapter 7?

A Chapter 13 can stop foreclosures and repossessions. A Chapter 13 bankruptcy can discharge things that a Chapter 7 cannot discharge.

What Makes a Chapter 13 Worse than a Chapter 7?

Chapter 13 attorney fees are higher AND you make monthly payments for 3-5 years.

During the Chapter 13 Bankruptcy, in Georgia, you will need to ask the Trustee for every major financial change, from buying a car to selling one.

What is Chapter 7?

A Chapter 7 is a liquidation bankruptcy where a debtor’s

•  Unsecured debt (with exceptions) is erased

•  Allowed out of contracts

•  Can be held not liable for secured debt in the future that was released in the bankruptcy

•  Can lose any property that is not exempt or exempt property not listed in the bankruptcy.

•  The principle of a Chapter 7 bankruptcy is that the Debtor is allowed to keep a small amount of exempted property to start over with and his creditors keep the rest of the property. The Debtor hands over all other assets including any excess funds in :

•  a checking account,

•  tax refund,

•  inheritances etc.

and is no longer held responsible for his debts, at least in part. It is rare that any real assets are ever unwillingly handed over in a Chapter 7 if it is properly planned. Most people do not have any assets to hand over after they are allowed to keep their exempted property. Normally, all the property that the Debtor has is mortgaged or has liens on it or it is exempted.

Georgia Exemptions

NOTE: Just because you think you will lose property due to the exemptions below DOES NOT MEAN YOU WILL LOSE IT. There are many strategies we can employ to save your property! The vast majority of people filing lose NOTHING!

Your “equity” is that part of the property that you own. To figure out how much equity you have, deduct what you owe on the property from what it is worth: The part of the house, car, or property that you own is called your personal equity (or the Debtor’s equity) in the property. The part of the house, car, or property that the bank owns is called the Bank’s or Creditor’s equity. In a Chapter 7, your property or your equity must be less than or equal to the exemptions in order to keep that property. If this is going to be a problem, the Attorney preparing your bankruptcy should advise you that you have too much equity and tell you to consider a Chapter 13. This is rarely a problem.

Positive Aspects of Chapter 7:

Immediately upon filing your petition with the Court, an automatic stay is invoked and Creditors must stop their collection actions against you. This means they cannot call or write you, or repossess or foreclose on your property. In addition, the automatic stay will stop a lawsuit if one has been filed against you.

It will also reinstate your drivers license if you have lost it due to involvement in an accident with too little or no insurance. This immediate action by the Court relieves the pressure on you and your family.

With some exceptions, such as child support, most of your debts are wiped out. If you properly file a Chapter 7, you will no longer have to repay your debts and your debts will be “discharged”. A discharge in bankruptcy means that you no longer personally owe the debts. However, property that you have given as security may be repossessed if you don’t pay for it or co-signers may be required to pay the debt. Nearly 100% percent of all Chapter 7 bankruptcies are granted. Your goal in a Chapter 7 bankruptcy should be to “exempt” all of your assets so that you can keep all of your property and still wipe out all of your debts. However the trustee will attempt to grab any assets you fail to properly “exempt”.

The Chapter 7 process is quick, and it is the cheapest bankruptcy. It also offers you almost all the benefits of bankruptcy. It usually only takes about 120 days. It is often the best way to deal with a predatory mortgage where you owe 125% of the value of a home or you have a high interest rate.

It allows you to repair a poor credit rating and purchase houses and cars shortly after filing. Repairing your credit is done by making prompt payments on accounts after you file. If you had bad credit before you filed a bankruptcy, a Chapter 7 is a chance to repair your credit. A Chapter 7 bankruptcy can be reported for 10 years, but your present bad credit will be reported for 7 years after the last collection action (which can make it last far longer than 10 years). Most people who file bankruptcy already have damaged credit, so a Chapter 7 bankruptcy is unlikely to harm it very much further.

Make contractual payments promptly and reaffirm the debt with the same or different terms and possibly make up missed payments (the Creditor may not wish to reaffirm the debt if the contract is in default)

Continue making payments with same terms but without liability.

Redeem the property by paying its value in a lump sum

Give up the asset to satisfy the debt.

 

Negative Aspects of Chapter 7:

•  Filing Chapter 7 will damage your credit rating if you had good credit before you filed.

•  Chapter 7 does not discharge all debts. Some debts, such as child support, are non-dischargeable. It also does not discharge as many types of debts as a Chapter 13.

•  The rights of secured Creditors may not be modified in a Chapter 7. These rights may be modified in a Chapter 13. An exception is that judicial liens and liens on household goods may be destroyed in a Chapter 7 and avoided if you tell your Attorney about them.

•  In a Chapter 7, your only options when you want to keep an asset that is collateral for a debt are to either make timely payments, redeem, reaffirm, or surrender.

•  A Chapter 7 does not protect co-signers and only protects joint property belonging to the Debtor while the Chapter 7 stay is in effect.

•  If your income is too high, you may not qualify for a Chapter 7

•  You may only get one Chapter 7 discharge every 8 years. This time period runs from the date of filing (when the first case started) to the date of the new filing. Many people say you can file bankruptcy only once every 7 years, but they are technically wrong. You may file more than one bankruptcy in 8 years, but you can only get one Chapter 7 discharge every 8 years.

Lien Stripping

Wouldn’t it be nice if you could remove your second mortgage and pay it off as an unsecured debt for pennies on the dollar?

With home prices at record lows and foreclosures at record highs, many homeowners are facing the fact that their home is worth substantially less than what is owed on the mortgage. Many of these homeowners that feel trapped in a home that is “upside down,” are making the difficult decision to walk away from their properties. There are two areas where homeowners can use a chapter 13 bankruptcy filing to remain in their homes – one, when they are behind on payments and need time to get caught up, and two, to remove a second mortgage or home equity line of credit from their home.

Lien Stripping in Chapter 13

“Lien stripping” refers to the process of reducing a secured claim to the value of the underlying collateral. It uses the combined effect of 11 U.S.C.A. § 506(a) and 11 U.S.C.A. § 506(d) to bifurcate the lien into secured and unsecured. The secured lien is allowed in the amount up to the fair market value of the property at the time of the stripping. The balance of the lien, which exceeds the fair market value of the property, is now deemed unsecured.

Liens can be stripped off of the debtor’s assets in Chapter 11 or Chapter 13 when there is not enough equity in the assets. Section 506(a) and 506(d) of the Bankruptcy Code acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches. To the extent that the claim exceeds the value of the collateral, that portion of the lien is now unsecured. The most common application of lien stripping is the reduction of car loan liens to the present value of the vehicle however it is currently used more often with home mortgages in bankruptcy situations. Lien stripping with car loans has been limited to vehicles purchased over 910 days.

Lien Stripping in Chapter 7

In In Re McNeal, Case No. 11-11352 (11th Cir., May 11, 2012), the 11th Circuit ruled that a  debtor could strip off a home lien in Chapter 7 bankruptcy if no part of the lien is secured by the home’s equity (this is referred to as being “wholly unsecured”).  This means that currently you can also remove a junior mortgage in a Chapter 7 case.

Why Chapter 13?

For some debtors, Chapter 13 bankruptcy is a better option than Chapter 7 bankruptcy. And sometimes Chapter 13 is the only option because a debtor is not eligible for Chapter 7 bankruptcy.

It’s important to sort out the issues and decide which form of bankruptcy is best for you. Many debtors assume that Chapter 7 bankruptcy is better than Chapter 13 bankruptcy because Chapter 13 requires debtors to repay a portion of debt, whereas Chapter 7 wipes out most debts. But this is not always the case. Here are some good reasons to file for Chapter 13 bankruptcy.

You Are Not Eligible for Chapter 7 Bankruptcy

Some debtors cannot file for Chapter 7 — leaving Chapter 13 as the only option. You cannot file for Chapter 7 if both of the following are true:

  • Your current monthly income over the six months prior to your filing date is more than the median income for a household of your size in your state.
  • Your disposable income, after subtracting certain expenses and monthly payments for debts you would have to repay in Chapter 13, exceeds certain limits set by law. These calculations are commonly referred to as the “means test” — if you have the means to repay a certain amount of your debt through a Chapter 13 repayment plan, you flunk the test and are ineligible for Chapter 7 bankruptcy. (For more information, including links to the median income in your state and an online calculator you can use to see whether you pass the means test.

The means test can get fairly complex — and, to make matter worse, Congress has its own definitions of “disposable income,” “current monthly income,” “expenses,” and other important terms, which sometimes operate to make your income seem higher than it actually is.

There are a few other eligibility criteria for filing for Chapter 7. For example, you cannot get another Chapter 7 discharge if you have received a Chapter 7 bankruptcy discharge within the last eight years, or a Chapter 13 discharge within the last six years.

When Chapter 13 Might Be Better Than Chapter 7

Even if you are eligible for Chapter 7 bankruptcy, there are some situations when filing for Chapter 13 may be more advantageous than filing for Chapter 7.

You are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original agreement. You cannot do this in Chapter 7 bankruptcy. You can make up missed payments only in Chapter 13 bankruptcy.

You have a tax obligation, student loan, or other debt that cannot be discharged in Chapter 7. You can include these debts in your Chapter 13 plan and pay them off over time.

You have a sincere desire to repay your debts, but you need the protection of the bankruptcy court to do so. This might be the case if creditors are coming after you, or if you simply require the formal structure and deadlines the Chapter 13 process provides in order to follow through on your good intentions.

You have nonexempt property that you want to keep. When you file for Chapter 7 bankruptcy, you get to keep only exempt property — property that is protected from creditors under state or federal law. You have to give your nonexempt property to the bankruptcy trustee, who can sell it and distribute the proceeds to your creditors. In Chapter 13, you don’t have to give up any property. Instead, you repay your debts out of your income. So, if you have nonexempt property that you can’t bear to part with, Chapter 13 might be the better choice.

You have a codebtor on a personal debt. If you file for Chapter 7 bankruptcy, your codebtor will still be on the hook — and your creditor will undoubtedly go after the codebtor for payment. (Learn more about codebtors in Chapter 7 bankruptcy.) If you file for Chapter 13 bankruptcy, the creditor will leave your codebtor alone, as long as you keep up with your bankruptcy plan payments.

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This site has been designed to assist Georgia consumers in their decision to file for bankruptcy protection. If you decide to go forward with filing make sure to select a qualified bankruptcy attorney to assist you.

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