Chapter 13 Bankruptcy – what happens if you have equity in your house, or you earn too much to file a Chapter 7?
A Chapter 7 liquidation bankruptcy does not
always work for everyone. What happens if you have equity in your residence, or
if you make too much money? You can
still ask for relief from the Bankruptcy Court.
Chapter 13 bankruptcy is
referred to as a personal reorganization bankruptcy. Your property is not sold
when you file for Chapter 13 protection, and if you successfully complete a
court-mandated repayment plan, you can keep your property. You may be able to avoid paying a portion of
your unsecured debt (debt that is not secured by collateral), such as credit
card, personal loan or medical debt. You
can avoid foreclosure, and avoid repossession.
You can avoid predatory lenders, and you can avoid high interest
continuing to accrue on your credit cards.
Provided the repayment
plan includes back payments on your secured assets, such as your home or car
(debts that are secured by property), and you are on time with your current payments,
you can keep the assets after the repayment plan is over.
After completing the repayment
plan, in which you pay your creditors any back-mortgage payments, and all or a
portion of the outstanding unsecured debt over a fixed period of time, any
remaining unsecured debts could be "discharged." When debt is
discharged, it means you're no longer required to pay back the debt. Depending
on your income, your repayment period may be three years or five years. Even if you have to pay all of your unsecured
debt back over a five-year period, Chapter 13 may still help you.
Why
not just file a chapter 7 and discharge all of your debts?
Income: If you earn too much income, you cannot file
a Chapter 7 bankruptcy. You will “fail”
the means test. This is called “disposable income”. The amount of income you can have varies,
depending on where you live and how many people you have living in your house. Before deciding to file a Chapter 13 based on
income, make sure that your income is above the threshold amount. It is not a “one size fits all” calculation. Initially,
your attorney will look at the medium family income for your geographic
location, and the number of people residing in the residence. However, that is not the end of the inquiry. Adjustments can be made for things like
mortgage payments, medical expenses, child care costs, automobile costs. A presumption of abuse (the outcome when income
exceeds the allowable income for the family) can sometimes be overcome with
further analysis. If, after further analysis of your expenses, the income
threshold still exceeds the allowable limit, then Chapter 13 should be
considered.
Assets:
Even if your income is below the threshold, you may have too much equity in
your home. Currently, the federal
homestead exemption is $25,150.00 for a single person and
double for a married couple under 11 U.S.C. § 522(d)(1). This amount is set by
statute and is set to change in 2022. The equity refers to the difference between
the current value of your house and the balance of the mortgage. If your
mortgage balance is greater than the value of your home, you have no
equity. If your equity exceeds the exemption limit, then Chapter 13 may
be the right approach.
Chapter 13
Eligibility: You will need to determine if you are eligible for
Chapter 13 protection.
To be eligible to file for a Chapter
13 bankruptcy repayment plan you must have regular income, your total unsecured
debts need to be less than $394,725.00 and your total secured debt under
$1,184.200.00. These amounts are changed
periodically to reflect changes to the consumer price index.
Also, you cannot file for Chapter
13 if you have a prior bankruptcy petition that was dismissed in the 180 days
prior to filing, (there are however some exceptions to this). A Chapter 13
debtor must be a person and not a corporation or partnership (although there
are other options available to those entitles).
Do
I Have to Pay All of My Debts?
If you file for Chapter 13
protection, you may be able to have the balance of certain secured loans
reduced. For example, in a Chapter 13 "cramdown," your court approved
repayment plan may reduce the balance on your car loan to the depreciated value
of the car, or deal with a second mortgage. That can make repayment easier.
Unsecured debts, such as credit
card balances and medical debt, can be "discharged" in both types of
bankruptcy however, you may have to pay back some of your unsecured debts in
your Chapter 13 Plan, or you may be able to discharge some or all of them. This
depends in part on the amount of equity in your home. The unsecured creditors
need to be paid at least what they would have received had your home been
sold. It also depends on the level or
your income and your expenses and should be looked at carefully before drafting
a Chapter 13 Plan.
How
is a Chapter 13 Filed?
The procedure is similar to
filing a Chapter 7, with the exception that the repayment plan needs to be
prepared. You will have to complete all
of the bankruptcy forms and include all of your income sources, the value of
your assets and your debts. You will also need to file a certificate of credit
counseling prior to filing the case. A married couple may file a joint petition.
Once the petition is filed, there is the same “automatic stay” put in place
that is present when filing a Chapter 7, meaning that all collection and
litigation must immediately stop. There can be no garnishment, collection,
foreclosure, repossession or law suits filed. However, the “stay” will only be
in effect for a short time in a Chapter 7 to prevent foreclosure or
repossession. In a Chapter 13, it is
possible to make that relief permeant if you can complete a repayment plan
acceptable to the Court. Therefore, even if you will have to pay back all of
the unsecured debts over the life of the repayment plan, there is still a
significant benefit to seeking a Chapter 13 discharge rather than simply trying
to pay off your debts over time.
What
is a Chapter 13 Plan?
Once you file the bankruptcy
petition with the Court, you must also file a repayment plan, either with the
petition or within 14 days after the petition is filed, referred to as the
Plan. The statute requires that the Plan be submitted for Court approval. The
Court will hold a hearing called a Confirmation Hearing. The payments are fixed
under the Plan and provide for repayment of some or all of your debts. The Plan
should be carefully crafted to allow for the least possible payments, while
preserving your property.
How
Much Does A Chapter 13 Cost?
The filing fee for a
Chapter 13 is currently $310.00. The fee
must be paid at the time the case is filed. However, in limited circumstances,
it can be paid in up to four installments. The fee is the same if a married
couple files jointly. The legal fee for
preparing the Chapter 13 petition, schedules and Plan will be greater than for
a Chapter 7 because there is more work involved. Not only is there a Section
341 Meeting of Creditors, as in a Chapter 7, there is also a Confirmation
Hearing for the Court to determine whether the Plan is acceptable and the Plan
may need to be amended several times over the life of the case. The Court
monitors and controls how much an attorney can charge. If the fees are too high the Court will
require the attorney to show why the fees were reasonable. Typically, the cost can be between $3,000.00
to $4,000.00 or higher depending on the complexity and urgency of the case. The
United States Bankruptcy Court for the District of New Jersey considers that a
presumptively reasonable fee in a consumer bankruptcy Chapter 13 is
$4,500.00. If an attorney charges more
than the presumptively reasonable fee, the attorney has to inform the Bankruptcy
Court the reasons for the fee.
How Long Will a Chapter
13 Bankruptcy Stay on My Credit Reports and Impact My Credit Score?
If you were already behind on
debt payments before you filed for bankruptcy, your credit scores may not fall
much more once you apply for bankruptcy protection. Typically, Chapter 13
remains on your credit reports for up to 7 years (Chapter 7 says on your credit
report for 10 years). While there will be an impact on your credit score, as
time goes by, the impact of the bankruptcy on your scores will decline. During this period you can also begin
to rebuild your
credit by
making on-time bill payments and managing your debts smartly. If utilized correctly, Chapter 13 can give
you the fresh start you need to deal with your debts and assets.
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