How a Chapter 13 Bankruptcy Works

A Chapter 13 bankruptcy is a three to five year repayment plan. A person will generally file a Chapter 13 bankruptcy if either:

They are behind on their house or car payments and want to keep their house or car; or

They do not qualify for a Chapter 7 bankruptcy because their household income exceeds the amount allowed within the Means Test.

The Means Test is basically a calculation of your household income over the past six months compared to the median for the state where you live. If the household income for the past six months exceeds the median, your disposable income will be reviewed. If a debtor exceeds the median income, the Chapter 13 plan will be paid over a five-year period.

The Chapter 13 bankruptcy plan will include the amount you are behind on your home, your monthly house payments to your mortgage company, your auto loans, taxes and a percentage of unsecured debts including credit cards, personal loans, medical bills, old repossessions and old foreclosures. A monthly payment will be determined, and you will make this payment each month to the Bankruptcy Trustee, who will then distribute the money to your creditors based on federal law.

Your House Payment in Chapter 13 Bankruptcy

If the Chapter 13 bankruptcy is filed with the court on or after July 1, 2009, your house payment will almost always be included in the Chapter 13 plan payment you make to the Chapter 13 Trustee. The most likely exclusion would be for a home equity line of credit or HELOC where the monthly amount due the lender or mortgage company varies each month depending on the interest rate. In many cases, a HELOC can be an interest only loan.

Any changes to your mortgage payments, including increases in payments due to interest rate changes, escrow changes, etc. will be sent to the Chapter 13 Trustee from your mortgage company. As a result, your Chapter 13 plan payments to the Trustee may increase or possibly decrease periodically due to changes in your mortgage. The Chapter 13 Trustee will provide you with notice of the change in your Chapter 13 plan payments prior to the effective date of the change.

Your Car Payment in Chapter 13 Bankruptcy

If you are purchasing a car and want to keep it, the amount owed to the finance company for your car will be included in the payment to the Bankruptcy Trustee. If you are leasing a car and you want to keep it, you will make those payments directly to the finance company from whom you are leasing the car. Remember, these expenses are considered in determining your Chapter 13 payment to the Trustee.

What a Chapter 13 Bankruptcy Cannot Do

It is also important to note that, just like a Chapter 7 bankruptcy, a Chapter 13 bankruptcy will not wipe out certain debts. These include student loans, most taxes, alimony, and child support. In most Chapter 13 cases, however, taxes, alimony and child support arrears (or back payments) are repaid over the course of the Bankruptcy when the Trustee distributes the money to your creditors. Student loans will be reviewed and recommendations will be based on your specific situation, although generally these must be repaid in full.

How a Chapter 13 Bankruptcy Affects Your Creditors

After filing your Chapter 13 bankruptcy, most of your creditors will no longer be able to call and harass you about your debt. Instead, they must contact our office – this is required by law. However, if you are making direct payments to a creditor (for example, your mortgage company or companies) they may still contact you, usually through written correspondence.

Completing Your Chapter 13 Bankruptcy

If you make your monthly Chapter 13 Trustee payments and all steps are followed, you will likely receive report of completion of plan payments after your designated 3 to 5 year time period. The discharge means that you have repaid most, if not all, of your debts and you are no longer responsible for any outstanding balances. The exceptions are a mortgage, student loans and on-going alimony and child support. You can begin a fresh financial future.

As you can see, Chapter 13 bankruptcy law is complicated and, for most people, often confusing. Contact us for your free evaluation so that we may guide you through the bankruptcy process. In the meantime, if you want to learn even more about Chapter 13 bankruptcy, see our Chapter 13 Bankruptcy Frequently Asked Questions!