What is Chapter 13 Bankruptcy?

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is most appropriate when debtors want to catch up on overdue mortgage or car payments.  Chapter 13 bankruptcy allows the debtor to repay their arrears over the course of 3-5 years, depending on their household income.

Although creditors might object to the plan, the court has the final ruling in these cases.  If the debtor makes the required payments to the Chapter 13 Trustee, based on the proposed plan, they are legally entitled to keep their property. 

One of the advantages of filing Chapter 13 cases over Chapter 7 is that some of the debts that cannot be discharged in 7 can be discharged in 13 For example, depending on the fair market value for your house, your second mortgage could be “stripped off” in a Chapter 13 bankruptcy, and treated like any of your unsecured debts (i.e., credit cards), only receiving whatever monies are available based on the calculations of disposable income after all other mortgage and auto payments are made.  Also, the debtor can pay some non-dischargeable federal taxes over the term of the Chapter 13 plan without interest. 

Chapter 13 can only be filed by an individual, not a corporation.  A debtor who also owns a business is allowed to operate it under Chapter 13 while still paying off their debts. 

David Giller, Esq. is a Consumer Law attorney, providing professional, confidential and compassionate legal advice throughout New York City and northern New Jersey in financially stressful matters including bankruptcy, foreclosure defense, debt settlement, Fair Debt Collection Practices Act and Fair Credit Reporting Act. To learn more about David or his law practice, visit www.gillerlaw.com.

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Q&A: What is Chapter 7 bankruptcy?

Q: I’ve heard various references to Chapter 7, Chapter 11 and Chapter 13 bankruptcy. Several people have told me that Chapter 7 bankruptcy is most appropriate for me. What is Chapter 7 bankruptcy?

A: Chapter 7 bankruptcy is a liquidating bankruptcy.  That means that in return for having most or all debts discharged (no longer legally obligated to pay them), the debtor must turn over any non-exempt property.

If the debtor has more assets than can be exempted, the trustee sells/liquidates those assets and gives the money/proceeds to the creditors as payment.  There are laws to establish which creditors have priorities over others.  However, in most cases, the debtor has nothing so the creditors receive no money.  In Chapter 7 cases, the debtor comes out of bankruptcy without any future financial obligations to creditors.  However, there are certain debts that cannot be discharged through bankruptcy, including child support, alimony and debts incurred through fraud.

Chapter 7 – Exempt Property: 

In a chapter 7 case, you can keep all property which the law says is “exempt” from the claims of creditors.

It is important to check the exemptions that are available in the state where you live. (If you moved to your current state from a different state within two years before your bankruptcy filing, you may be

required to use the exemptions from the state where you lived just before the two-year period.) In some states, you are given a choice when you file bankruptcy between using either the state exemptions or using the federal bankruptcy exemptions. If your state has “opted” out of the federal bankruptcy exemptions, you will be required to chose exemptions mostly under your state law. However, even in an “opt-out” state, you may use a special federal bankruptcy exemption that protects retirement funds in pension plans and individual retirement accounts (IRAs).

If you are allowed to use the federal bankruptcy exemptions, they include:

- $20,200 in equity in your home;

- $3225 in equity in your car;

- $525 per item in any household goods up to a total of $10,775;

- $2,025 in things you need for your job (tools, books, etc.);

- $1075 in any property, plus part of the unused exemption in your home, up to $10,125;

- Your right to receive certain benefits such as Social Security, unemployment compensation, veteran’s benefits, public assistance, and pensions–regardless of the amount.

The amounts of the exemptions are doubled when a married couple files together. Again, you may be required to use state exemptions which may be more or less generous than the federal exemptions.

In determining whether property is exempt, you must keep a few things in mind. The value of property is not the amount you paid for it, but what it is worth when your bankruptcy case is filed. Especially for furniture and cars, this may be a lot less than what you paid or what it would cost to buy a replacement. You also only need to look at your equity in property. That means you count your exemptions against the full value minus any money that you owe on mortgages or liens. For example, if you own a $50,000 house with a $40,000 mortgage, you have only $10,000 in equity. You can fully protect the $50,000 home with a $10,000 exemption.

While your exemptions allow you to keep property even in a chapter 7 case, your exemptions do not make any difference to the right of a mortgage holder or car loan creditor to take the property to cover the debt if you are behind. In a chapter 13 case, you can keep all of your property if your plan meets the requirements of the bankruptcy law. In most cases you will have to pay the mortgages or liens as you would if you didn’t file bankruptcy.

David Giller, Esq. is a Consumer Law attorney, providing professional, confidential and compassionate legal advice throughout New York City and northern New Jersey in financially stressful matters including bankruptcy, foreclosure defense, debt settlement, Fair Debt Collection Practices Act and Fair Credit Reporting Act. To learn more about David or his law practice, visit www.gillerlaw.com.

Q&A: What alternatives are available for me to avoid bankruptcy?

Q: Several people have suggested that I file for bankruptcy. I want to avoid it. What are the alternatives to filing for bankruptcy?

A: There are several viable alternatives to filing for bankruptcy. Whether or not these alternatives are right for you depends on several factors including the amount of your debts, your current household income, available cash to pay off your debt, etc.

Alternatives to Bankruptcy

  • Out of court settlement with creditors
  • Reduction of payment to creditors
  • Attaining help from consumer credit counseling services
  • Payment of debts by selling or further mortgaging a property

These alternatives require the cooperation of creditors.  It is more likely that they will agree to these alternatives soon after financial difficulties begin. The worst thing you could do is avoid speaking with your creditors. If you want to resolve your situation without paying fees to a professional, simply call your creditors and explore what type of payment plan they can arrange with you.

David Giller, Esq. is a Consumer Law attorney, providing professional, confidential and compassionate legal advice throughout New York City and northern New Jersey in financially stressful matters including bankruptcy, foreclosure defense, debt settlement, Fair Debt Collection Practices Act and Fair Credit Reporting Act. To learn more about David or his law practice, visit www.gillerlaw.com.

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