Is Chapter 13 Right for You?

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.