What Is A Chapter 13 Bankruptcy?
A Chapter 13 bankruptcy is the reorganization of the debts of an individual who has a regular income. It is a repayment plan paid over three to five-years. You repay all or a portion of your debt depending on certain factors. It is ideal for three kinds of people.
The first is someone who is behind on their mortgage or automobiles and they want to catch up. They have to want to catch up. We put the arrearage, meaning the amount that they are behind, into a repayment plan and repay that over the life of the plan.
The second type of person who files for a Chapter 13 is someone who has equity in their house or other property. For instance, if they have a $93,000 Maserati, somebody who has equity in property that is otherwise non-exempt, they have to pay back the non-exempt portion of their equity. A good example would be a house worth $250,000 on which is owed $200,000, meaning that they have $50,000 of equity. However, if they have a $100,000 of credit card debt, that person would only have to pay back half of it based on the Chapter 7 liquidation test. That is the test that says the equity that you have is the amount of money that you would have to pay back to your unsecured creditors.
The third type of person who files for a Chapter 13 is someone who makes too much money. Congress came up with something called the Means Test in 2005 to keep rich people from filing a Chapter 7. They must go into a Chapter 13 repayment plan where they repay all or a portion of their debt.
What Are The Main Differences Between a Chapter 7 And A Chapter 13 Bankruptcy?
You can think of a Chapter 13 as a debt consolidation repayment plan designed typically to help you stop a foreclosure or repossession so that you can keep your house or your car. Chapter 7 is known as a “liquidation”, meaning all of your non-exempt assets can be sold to pay your debts. Chapter 13 can be used to stop a foreclosure and/or repossession in return for the additional responsibility during the case. You pay your arrearage through the Chapter 13 plan and make your monthly payment as if you never fell behind. You commit to the case for three to five years. Chapter 7 does not provide those benefits or require that kind of responsibility. The time frame is therefore relatively short by comparison.
A chapter 7 case typically lasts ninety to one hundred and ten days. At the end of a chapter 7 you receive a discharge. It is fast, and easy. A discharge is a forgiveness of all of your all debts. That is, all debts except for four categories; child support and spousal support, fines and restitution in a criminal case, all student loans, and most taxes are not exempt.
How Do Debt Consolidation Services Compare With A Chapter 13 Bankruptcy?
Sometimes they call those credit counseling services. There is a requirement for credit counseling to file a bankruptcy, and this kind of credit counseling simply results in a certificate that says you took the class. In the process of getting that certificate, they are supposed to offer you a repayment plan program. My experience is that most of these debt consolidation services take your $200 a month, put $20 in their own pocket or sometimes $40, and then take the rest of your money and put it into a trust situation, like escrow, where you have a largesse of money that is held back in abeyance waiting for a time when they can contact the creditors and negotiate a settlement. They have to have money to negotiate a settlement, pennies on the dollar.
Typically if you owe $10,000, they will offer $1,500, but they cannot offer the $1,500 unless you have it saved up. Our experience is that after nine to eleven months, you are going to be sued by your creditors, because you have paid nothing out except to this credit counseling service. My belief is that private debt consolidation almost never works.
What Debts Can Be Discharged In A Chapter 13 Bankruptcy?
Just like a Chapter 7, in a Chapter 13 all your debt is discharged except for those four categories. There is a fifth category that is not dischargeable, and that is debt incurred by fraud or your willful personal tortuous conduct towards another person.
I had a person who punched his neighbor in the face and the neighbor sued him. He filed bankruptcy and we went to court. We had a long fight where I basically had to do a criminal case to establish that the striking of his neighbor was in self-defense. The wife and daughter backed him up. All the witnesses seemed to back him up, but when he took the stand, he was just such an obvious liar that we lost the case. He hit his neighbor maliciously and therefore he could not get out of the debt. There is a list in Section 523 of the Bankruptcy Code of things that are not dischargeable.
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