Ford Flower Hasbrouck & Loefflad 

Attorneys at Law

This article is intended to give general information only.  It is not intended to give legal advice to any person on a specific case or controversy, and does not create an attorney-client relationship.  If you are considering filing bankruptcy you should consult an experienced bankruptcy attorney.


WHY CHAPTER 13 BANKRUPTCY MAY BE THE RIGHT CHOICE

FOR YOU AND YOUR FAMILY


For most people facing debt problems, a Chapter 7 bankruptcy filing is the best option.  By filing Chapter 7, most people can eliminate all of their debt and enjoy a “fresh start.”  But, in some situations, a person may not be eligible to file Chapter 7 because (1) they have too much income, (2) the value of their assets exceed the bankruptcy exemptions, or (3) they previously filed a Chapter 7 bankruptcy within the preceding 8 years.  Additionally, a Chapter 13 bankruptcy reorganization sometimes offers advantages over a Chapter 7 bankruptcy. 


This article is intended to explore the many reasons a person may choose to file a Chapter 13 bankruptcy reorganization instead of a Chapter 7 bankruptcy.  Preliminarily, it should be noted Chapter 13 is available to individual filers with regular income only.  Businesses are not eligible to file a chapter 13 bankruptcy; businesses seeking to reorganize their finances must file under Chapter 11.


What is an “individual with regular income?”  Regular income may include employment income, self-employment income, unemployment compensation, social security income, rental income, disability income, or any other source of income received on a regular basis.   Individuals with no source of regular income may not file under Chapter 13.


There are many reasons why a person may want to file a Chapter 13 bankruptcy reorganization.  Some of the reasons may include the following:


AVOID FORECLOSURE:  The most common reason a person may file a Chapter 13 reorganization is to stop foreclosure proceedings against their home or other real estate.  In a Chapter 13, a person may file a plan with the bankruptcy court to cure their mortgage arrearages  and bring their mortgage loan back into good standing.  The plan must be at least 3 years and may be as long as 5 years depending on the circumstances.  During the course of the bankruptcy plan, all foreclosure proceedings and other legal proceedings are stopped and cannot move forward without permission of the bankruptcy court.  Under a Chapter 13 reorganization plan, the homeowner would make a monthly payment to the bankruptcy trustee to pay back the arrearages on their mortgage; at the same time, the homeowner would need to make their regular monthly mortgage payments to their mortgage company. 


STRIP OFF 2ND MORTGAGES AND HOME EQUITY LOANS:  One of the biggest advantages to filing a Chapter 13 bankruptcy reorganization in today’s economy is the ability to strip off 2nd mortgages and home equity loans.  If you have more than one mortgage on your home and your home is worth less than what you owe on the 1st mortgage, you may strip off all other mortgages and treat them as unsecured loans.  In other words, if you own a home worth $200,000.00 and the home is subject to a 1st mortgage with a balance of $225,000.00 and a 2nd mortgage with a balance of $50,000.00, you may strip off the $50,000.00 loan and treat it as an unsecured debt.  If you complete the Chapter 13 plan, the $50,000.00 loan would be discharged.  In other words, you would NOT need to pay this loan at all.  The 2nd mortgage would be stripped off the home and you would only need to pay the 1st mortgage.


PAYOFF NON-DISCHARGEABLE DEBTS:  Some debts are not dischargeable in bankruptcy, such as certain tax debts, domestic support obligations, personal injury damages caused by a DUI offense, criminal restitution orders, and most student loan obligations (except where the student loans pose an “undue hardship.”).  If you owe a debt which is non-dischargeable, a Chapter 13 bankruptcy reorganization may be a good option for you.  A Chapter 13 bankruptcy will stop all collection activity and legal proceedings, and may allow you to negotiate better payment terms for non-dischargeable debts.


INCOME EXCEEDS MEANS TEST FOR CHAPTER 7 BANKRUPTCY:  In order to qualify to file a Chapter 7 bankruptcy, you must pass the “means test.”  There are four ways to pass the means test: (1) your household income falls below the state median average for a family of your size, (2) your monthly household income is less than your average monthly expenses based on certain IRS guidelines, (3) your monthly household income less your average monthly expenses based on certain IRS guidelines would not allow you to pay back at least $7,475, and (4) your monthly household income less your average monthly expenses based on certain IRS guidelines would not allow you to pay back the lesser of 25% of your total unsecured debt or $12,475.00.  If you do not pass the means test to file under Chapter 7, a Chapter 13 bankruptcy reorganization may be a good option for you.  Under Chapter 13, you may be eligible to pay back as little as $12,475.00 or 25% of your unsecured debt.  The rest of your unsecured debt would be discharged at the end of your plan.


PROTECT UNEXEMPT ASSETS:  The United States Bankruptcy Code provides very generous exemptions which you can use to protect your assets in a Chapter 7 bankruptcy.  For most people considering bankruptcy, all of their assets will fall within the exemptions and, as such, Chapter 7 would be the best option for these filers.  But, for some people, their assets do not fall within the exemptions.  For these people, a Chapter 13 bankruptcy reorganization may be a good option.  In this situation, Chapter 13 may allow you to eliminate most of your debt and still protect all of your assets.


There may be other reasons a Chapter 13 bankruptcy reorganization may be right for you.  If you are considering filing bankruptcy, you should speak with an experienced bankruptcy attorney.


Before making your choice of attorney, you should give this matter careful thought.  The selection of an attorney is an important decision.