There are two types of bankruptcy that debtors can file — Chapter 7 and Chapter 13. Chapter 7 is the better known of the two chapters and is significantly quicker and frequently cheaper to deal with than filing Chapter 13.
However, many debtors still opt for filing Chapter 13 for various reasons, including:
- making too much money and not qualifying for Chapter 7
- trying to save their homes in foreclosure
- having non-exempt equity in their personal assets (which makes filing Chapter 7 significantly more difficult)
- owing large amounts of non-dischargeable tax debts
If you find yourself in one of those situations, then filing Chapter 13 can be the best option that you have in order to help fix your financial problems.
You Must Make Monthly Payments
Chapter 13 is a reorganization of debts. Unlike a Chapter 7, it is not a quick fix. The average Chapter 13 lasts from three to five years. During that period, you make a monthly payment to the court. The payment covers many different fees:
- monthly disposable income that is distributed to the creditors
- repurchase of non-exempt assets from creditors
- attorney fees
- court costs
- trustee fees
In addition, many payment plans require that you also pay your secured loans in the plan, such as a mortgage or car payment.
The monthly payment is determined by looking at your income and expenses and determining what your monthly disposable income is. That will help determine your monthly payment. In addition, the monthly payment will include the non-exempt portion of an asset you want to keep. An example would be a vehicle that you own that is worth $7,000 and you own outright. You can only exempt $1,000 (in this scenario) and as a result owe $6,000 to the court for the non-exempt equity in the vehicle.
In a Chapter 7, you would have to pay the $6,000 in full very quickly. The benefit of filing Chapter 13 is that the $6,000 will be applied to your monthly payment over the three to five year plan.
Income Determines Chapter and Affordability
Income is the most common reason people opt for filing Chapter 13. Chapter 7 has strict qualifications related to a debtor’s income and if the debtor’s income is too high, they must pass a means test to qualify for Chapter 7. If the debtor has too much income and is unable to qualify, then they must file a Chapter 13 if they desire bankruptcy relief.
Income is important when it comes to filing Chapter 13 cases for another reason. Income affects affordability of the debtor’s monthly payments to the court. Debtors must be able to make their monthly payments on time every month through the entire bankruptcy. If they are unable to make timely payments, their case could be dismissed immediately and they would still be responsible for all of the debts that were supposed to be included in the bankruptcy.
Filing Chapter 13 Is Best If You Are in Foreclosure
Foreclosures are another reason why debtors file bankruptcy. Filing Chapter 13 is the best choice for people in foreclosure because of the duration of the bankruptcy. As the Chapter 13 process is a lengthy one (3-5 years), debtors have time to catch up on their delinquent balance with the mortgage company.
In addition, most bankruptcy courts have a mortgage modification mediation program. This program organizes the mortgage company and debtor’s paperwork collection process, which holds up most of the modifications outside of bankruptcy, and sets up a mediation where the two sides can negotiate a deal that is beneficial to both sides. The debtor can find a plan that works for them and makes it easier to catch up on their balance without having a bigger payment. The rate of success for the mortgage modification mediation program is high, and is much more successful than modifications done without the assistance of the bankruptcy process.
Do You Owe Back Taxes?
If you have back taxes, filing Chapter 13 may be beneficial for you as well. The IRS charges a high percentage of interest on tax debts that can be costly for a debtor. Back taxes can be dischargeable in a Chapter 7, but only in certain situations. As a result, debtors may elect to file a Chapter 13 and pay the balance owed on the back taxed without having to pay the high interest rate charged by the IRS as the interest is tolled during the timeline of the Chapter 13 bankruptcy.
Other Benefits to Filing Chapter 13
While Chapter 13 may not be as desirable as a Chapter 7 for some debtors, it can be the ideal chapter for many of them. In addition to the reasons listed above, debtors can sometimes get relief on their car loans in a Chapter 13 if their loan fits a particular situation. Outside of that, once a debtor is in a Chapter 13, they are covered by the automatic stay, which shields the debtor from all of their creditors for the duration of the bankruptcy.
Contact a Georgia Bankruptcy Attorney Today
Reorganizing debt by filing Chapter 13 may be the best option for you, and can save your homes, cars, personal assets, and most importantly, money. For more information, contact the Law Office of Jeffrey B. Kelly today.