A chapter 13 bankruptcy is often called a “reorganization.”
In a reorganization you are allowed to catch up on mortgages or automobile loans over a period of time.
When a bank or other creditor is uncooperative you can force them to work with you by filing a chapter 13 bankruptcy case. As long as you can catch up under the plan you can force the creditor to let you keep the property while you make up the back payments. Depending on your situation you may be able to strip off an unsecured second or third mortgage. There must be no property value securing the loan and you must successfully complete your plan payments.
Chapter 13 cases also allow you to keep non-exempt property. In a chapter 7 you are allowed to keep only exempt property and non-exempt property would be sold for the benefit of the creditors. In the chapter 13, you can keep the non-exempt property if you pay for it over the life of the plan, usually a three to five-year period.
Chapter 13 Eligibility
In order to qualify to file a chapter 13 you must be an individual with regular income and be within certain debt limits. As of the time of this writing, you may not have over $1,184,200 in secured debt (mainly consist of mortgages and car loans) and no more than $394,725 in unsecured debts (generally credit cards, medical bills, student loans, and income taxes). A corporation or partnership may not file a chapter 13.
You may not file a chapter 13 or any other chapter unless you have taken an approved credit counseling course within the preceding 180 days.There are very few emergency exceptions allowed.
You may not file under any chapter if within the preceding 180 days you had a prior bankruptcy petition dismissed due to your willful failure to appear before the court or comply with court orders, or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property on which they hold liens. 11 U.S.C. section 109(g), 362(d) and (e).
Chapter 13 Plan
The plan is your description of when creditors will be paid, how much they will be paid and how they will be paid. After you pay your living expenses, the balance of your income goes into plan payments. Creditors can object if not all your disposable income goes into the plan or if they think they are being treated unfairly under the plan terms. The trustee will review your plan and make sure that it meets the legal requirements and that you have enough regular income to fund the plan. The trustee must approve your plan.
Many people make the mistake of waiting for trustee approval to begin making their plan payments. You must begin making these payments within 30 days of filing your bankruptcy case. The trustee will hold your payments until the plan is approved and then begin to pay them out to creditors. If you do not make your plan payments, your case will likely be dismissed.
Your plan can be modified if you lose your job or there are other changes. There is also a provision for a hardship discharge and you may convert your chapter 13 to a chapter 7 at any time.
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Image courtesy of Leo Reynolds.