How Do You Determine Which Chapter Of Bankruptcy Is Feasible?
People typically get lots of advice from all the wrong people. They will talk to somebody and then come into my office and say that they need a Chapter 11 bankruptcy. A Chapter 11 is usually for United Airlines or General Motors. I am one of the attorneys who actually handles “personal” Chapter 11’s. They are referred to as “Individual” Chapter 11’s. Those are for a millionaire who wants to sell a house or wants to keep a house. Chapter 12 is for a family farmer or a family fisherman. I have started a couple of those, but they were difficult for my debtors to sustain their plan of repayment. Chapter 12 is for people who derive more than fifty percent of their income from farming or fishing activities. That leaves us with two kinds of bankruptcies that I call Consumer Bankruptcies: Chapter 7 and Chapter 13.
In another article I explained Chapter 7 and how it is fast and easy, and you can get out of your debt. But there is also Chapter 13, which is “the reorganization of the debts of an individual with regular income”. You have to be an individual, not a company. And you have to have regular income. It is a repayment plan over a three to five year period where you get to repay all or a portion of your debt based on certain factors. It’s for three kinds of people.
The first is someone who is behind on their mortgage and they want to catch up. You can also use the Chapter 13 to catch up on a car loan. If your car has been repossessed, I cannot get your car back with the Chapter 7. But if you come to me within a day or two or no more than a week or ten days after a repossession of your car, I can file a Chapter 13 and most times get your car back and put those arrearage payments into a plan of repayment. When you fall behind on your house or car payments, those missed payments are called an arrearage, and that arrearage can be paid through a Chapter 13 plan over a three to five year period.
You remember we talked earlier about the median income? If a person is an above median debtor, they have to have a five year plan. We put almost everyone into a five year plan. It allows you to stretch out your payments and it makes the payment lower. That usually provides more breathing room. It also allows you time to figure out your situation. Maybe you will start making more money during those five years, bag out of bankruptcy, and be able to pay your creditors in full.
The second type of person who needs a Chapter 13 is someone who has equity in their real estate. Perhaps the house is worth $400,000 and they owe $300,000. Well, there is equity of close to $100,000. If their debt is $200,000, then they would only have to pay back fifty percent of it. If their debt is $50,000, they would have to pay all of their debt back at basically $833 per month for five years. That would be a 100% plan.
We use something called the “Chapter 7 liquidation test”. If we were to file a Chapter 7 case, and the trustee were to sell that $400,000 house, there would be almost $100,000 left over to pay any debt. So the Chapter 7 liquidation test is to calculate how much would be available to pay back unsecured debt if we sold assets.
There is a third type of person who has to file Chapter 13, and that is somebody who does not pass the Means Test. The very first “test”, if you will, to the Means Test, is, “Do you, that’s you and all of your household members, do you make more or less than the median income for the state in which you live, dependent upon your household size.” We have people who make more than the median income who still pass the Means Test and they can file a Chapter 7.
If they do not pass the means test, line 45 of the means test has a dollar number, and it is the dollar amount that you will have to pay to your creditors per month for a five year period. Typically, that is a very doable amount. We have people who resist and say, “I can’t afford $897 a month!” But if you press them, you will find out that their minimum payments on their credit cards are (were) $1,200 a month, so they are actually benefiting from Chapter 13. There is one other wonderful thing about Chapter 13. The creditors receive their money interest free! And that is whether they are paid in full or only partially! So interest ceases to accrue, except on taxes and student loans, but for all other debt the interest ceases to accrue, and so you payback your debt interest free.
If somebody qualifies for Chapter 7, then I will always advise them that they qualify for a Chapter 7. Other attorneys may want to push people into Chapter 13. However, sometimes I have some people who want to file Chapter 13 anyway because they feel like they want to pay their debt back.
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