When to File Chapter 13 Bankruptcy

Over 90% of people who file bankruptcy file chapter 7 bankruptcy.  Chapter 13 is used only in very specific circumstances.  You would only consider a chapter 13 bankruptcy if:.

  • You have had a prior bankruptcy discharge in the last eight years.  If you have never filed bankruptcy, or it has been over eight years since you filed, you should consider a chapter 7 bankruptcy.
  • Your income is higher than the mean income in the state, or you cannot pass the means test.  There are two ways to qualify for a chapter 7 bankruptcy.  You can earn less than the mean income in the state.  This number depends on how many people you are taking care of with the money you make.  The larger your household, the more money you can make and still qualify for a chapter 7 bankruptcy. Even if you earn more than the mean income in the state, you can still qualify for chapter 7 bankruptcy.  If you are able to pass the Bankruptcy Means Test, you can still file chapter 7.  The Means Test takes into account more of your actual expenses.  For example, if you have ongoing medical expenses, or taxes, or even student loans that are not going to be discharged.  You can use expenses that will not be discharged to reduce your disposable income.  If your disposable income gets reduced, you might qualify for chapter 7 bankruptcy.
  • You are behind on payments for a secured asset you want to keep.  If you are way behind on payments for your home or your car, and you want to keep that asset, you might consider chapter 13 bankruptcy.  Alternatively, if the creditor is willing to work with you on the payments and not repossess or foreclose, you still might not need chapter 13.
  • You want to discharge marital debt, or tax debt, or some other debt that is not able to be discharged in chapter 7.  Chapter 13 is able to discharge a lot more debt than chapter 7 bankruptcy.  Let your bankruptcy lawyer tell you if you would benefit from a chapter 13 bankruptcy by discharging debt that would survive a chapter 7.  For example, if you were ordered to pay a lot of debt as a result of a divorce, or if you have a lot of tax debt.  That debt might survive a chapter 7 bankruptcy, but it would likely be discharged in chapter 13.
  • You want to control your student loan payments.  If your have aggressive student loan collectors, you can manage the collectioon through a chapter 13.  The student loan collectors have to take whatever the court tells them.  In chapter 13, that amount can be very low.  They cannot garnish or chase you.  They simply have to take what the court gives them for up to five years.
  • You have assets that are not exempt.  The Arizona exemptions make it so that most of the assets you would need are not part of your bankruptcy.  However, if you have assets that are not necessary, like a rental home, or too much equity in a home or car, you might consider chapter 13.  In chapter 13, you would not have to sell the rental house, or the expensive house or car, you could simply make payments to the court for the nonexempt portion.  You keep your stuff, and make affordable payments.  What could be better?

There are other less obvious reasons to consider chapter 13, but most people simply do not have these issues.  Most people, over 90%, will be better served with chapter 7 bankruptcy.  However, chapter 13 is a very good option.

Chapter 13 Does Not Mean Simply Repaying Your Debt

Chapter 13 does not mean you simply repay your debt.  In fact, most people pay a very small portion of their unsecured debt and get the same discharge as a chapter 7.  For example, let’s say you earn less than the mean income in the state.  However, you are forced into a chapter 13 bankruptcy because you have had a chapter 7 discharge in the last eight years.  The chapter 13 payments could be as low as $200 a month for 36 months.  At the end of that time, any unpaid debt is discharged, just like in a chapter 7.

You Can Declare Bankruptcy and Still Keep Your Property

If you are wallowing in debt and looking for a way out, it is not necessary to risk losing everything. While it is possible to simply walk away from your debt under some forms of bankruptcy, it also is possible to accept responsibility for your debt, but at a reduced level, and move forward with your life while keeping your home and other assets.

In Arizona, Nevada and Colorado, the bankruptcy attorneys of Want a Fresh Start, LLC can help you make the right choice. While sometimes the best choice is to walk away, sometimes that is too much to lose. That’s where Chapter 13 bankruptcy comes in.

Unlike Chapter 7, known sometimes as “liquidation bankruptcy,” Chapter 13 allows you to hang onto your assets. This is particularly useful for small-business owners. For smaller businesses, such as a sole proprietorship, Chapter 13 allows for reorganization of debt so that the business can continue while repaying a discounted amount of debt. The business owner can repay a portion of the business’s debt under a court-supervised repayment plan and keep the business going. There are eligibility requirements to qualify for a small business filing under Chapter 13, among them being that the business must generate enough income to make repayment of some portion of the debt feasible.

Chapter 13 is sometimes called a “wage-earner’s plan.” If you have income and are willing to devise a plan to pay back some of your debt over a period of three to five years, Chapter 13 might be your best choice. Chapter 13 gives individuals an opportunity to save their homes from foreclosure. A Chapter 13 filing halts foreclosure proceedings and presents the opportunity to cure mortgage delinquencies over time. The debt cannot be eliminated or reduced, but a Chapter 13 filing presents an opportunity to same your home.

Chapter 13 also allows a sole-proprietorship business to continue operating, with restructured debt. This presents an obvious benefit to a small-business owner who wants to continue operating the business and is able to do so with a restructured debt. Chapter 13 is usually beneficial in cases in which a sole proprietor has significant assets that are necessary to continue operating but would be reachable by the trustee in a Chapter 7 bankruptcy.

How Does Chapter 13 Work?

In general, when the debtor files a Chapter 13 bankruptcy petition, he files a repayment plan with the petition or no more than 14 days after the petition. The court appoints a trustee to administer the repayment plan. The plan must be approved by the court. The plan, based on the debtor’s income, provides for a set amount to be paid each month to the trustee, who distributes the money to the creditor’s on a basis set forth in the repayment plan. That plan may provide for creditors to receive less than they actually are owed. The amount repaid depends upon the debtor’s ability to repay. Unsecured debts do not need to be repaid in full so long as the trustee is satisfied that the debtor is paying as much as possible into the repayment plan. However, unsecured creditors must receive at least as much as they would have had the debtor filed for bankruptcy under Chapter 7 and the debtor’s assets were liquidated to pay the unsecured creditors’ claims.

In addition to unsecured creditors, there are priority claims and secured claims. Priority claims fall into categories set in the bankruptcy code and include most taxes and the costs of filing for bankruptcy, including court fees and the debtor’s attorney fees. Secured claims include such things as auto loans and home mortgages, where the lender can repossess the collateral. Priority claims must be paid in full. Holders of secured claims must receive the value of the collateral. Payments on secured claims can go beyond the term of the repayment plan approved by the bankruptcy court and can extend up to the full length of the original payment plan, such as 30 years for a mortgage.

No matter what chapter you file under, bankruptcy cannot eliminate all debts. Child support and alimony payments aren’t dischargeable. Student loans and unpaid taxes also will be staying with you. However, a filing under Chapter 13 can give you breathing room by halting collection actions and allowing you to establish a plan to repay what you can while also providing the opportunity to keep your house, your car, and your business.

Bankruptcy law is complex and to get a repayment plan approved under Chapter 13 requires a slew of related documents establishing what the debtor owes, to whom and for what, as well as how much the debtor earns, from whom, and how frequently. The hoops to jump through are numerous and are best not negotiated without assistance. Experienced bankruptcy counsel can help smooth your journey through bankruptcy and, in all likelihood, find ways to make that journey more financially beneficial for you.

Chapter 13 is Not For Everybody

Importantly, only some people can qualify for Chapter 13. In addition, even if you do, it may not be the best option for you under the circumstances. For this reason, you should always speak to an attorney before filing anything with the court that could affect your legal rights. We will review you case at no cost to you and help you determine what type of bankruptcy, if any is right for you.

Contact Want a Fresh Start, LLC today

If you are considering bankruptcy in Colorado, Nevada or Arizona, you need to consult with an experienced bankruptcy lawyer to explore your options. Whether you are a homeowner struggling to keep your house while paying your other bills, or a small-business owner who wants to keep the business going, there is a way under bankruptcy law to make things work. The bankruptcy lawyers of Want a Fresh Start, LLC can present you with all of your options and guide you to making the right choices. You can reach us at (866) 780-4855 or through our online contact form.