How does Chapter 13 work? Clients are asking us about Chapter 13 Bankruptcy, and while it has some similarities to Chapter 7, it's also way different. Chapter 7 fits best where you can't pay your debts and don't have many valuable possessions, but Chapter 13 makes sense if you have substantially more income (you can pay a portion of what you owe over time) and/or you own property that is not covered by the bankruptcy exemptions.
Chapter 13 can stop foreclosure
We often use Chapter 13 to stop foreclosure. Chapter 13 can allow a homeowner to catch up on missed mortgage payments, pay tax debts over time, or to wipe out an underwater second mortgage.
How Chapter 13 works
We figure out your disposable income, which basically means your take-home pay minus your actual living expenses.
How much do I have to pay to creditors? Once we know your disposable income, that may be close to what your "plan payment" will be. Your plan payment is the amount of money you will pay to your creditors over a three-to-five-year period. In general, your plan payment goes to pay off your secured debt (like a car loan) in full, as well as your priority debt (overdue taxes, government penalties, etc.) A portion of your general unsecured debt (credit cards, medical bills, legal judgments) is paid out of the rest of your plan payment, but that doesn't have to be paid in full, and lots of times, can be paid at pennies on the dollar..
How do I make my plan payments? You make plan payments directly to the Bankruptcy Trustee, who tacks on an additional fee (in Minnesota, the fee is about 7 percent of your payment) and spreads each payment out to your creditors. You need to have steady enough income to stick to payments, because if you miss them your case will almost certainly be dismissed.
How much does Chapter 13 cost? The filing fee is currently $310, which is 25 bucks less than the Chapter 7 filing fee. The total attorney's fee for Chapter 13 is usually more than Chapter 7, but most times you end up paying the same or even less, since we have the ability to take some of our fees from the plan payments, meaning that it comes out of your creditors' pockets, not yours.
How do we know which chapter you should file? There are a few common scenarios where you might choose a Chapter 13 bankruptcy.
Your net income is too high for Chapter 7 (you don't pass the means test)
You own a home but you're behind on your mortgage or facing foreclosure
You're way underwater on a second mortgage
You are behind on your debt payments, but you can catch up if you just had more time
You have valuable property which is not exempt, but you can afford to pay your creditors over time