What You Need To Know About Chapter 13
Definition Of Chapter 13 Bankruptcy
Chapter 13 bankruptcy is considered a reorganization of debt, we have talked about Chapter 7 which is about a 3 to 4-month process.
It can liquidate certain kinds of assets it usually doesn’t, and it just discharges a debt that can be discharged, leaves the rest and then you go on with your life.
Chapter 13 however, has a monthly payment associated with it, and it can last up to 5 years, in some very unusual circumstances it may last up to 7 years under the care’s act.
There’s a monthly payment called a plan payment that you have to do with the Chapter 13, the payment is sent to the Chapter 13 trustee and then the trustee distributes that money received to all of your creditors.
Reasons To File A Bankruptcy Under Chapter 13
- Catching up on mortgage payments at 0% interest and with no late fees;
- Repaying tax debt without accruing interest or penalties;
- Getting current on child or spousal support payments;
- Needing bankruptcy relief but not qualified for Chapter 7;
- Wanting the protection against collection (the automatic stay) to apply to a co-debtor, like a non-filing spouse, or a family member who co-signed on a loan;
- A personal preference to repay a portion of the debts owed.
How Long Does Chapter 13 Last?
It depends on so many factors, as of right now if you were to file for bankruptcy under Chapter 13, it would last a minimum of 3 years a maximum of 5 years.
If you filed bankruptcy before the pandemic hit, then you might be able to extend it up to 7 years.
In some circumstances, if you have not very much debt and you’re able to pay it all off at 100 percent in under 3 years, then, of course, there wouldn’t be anybody left to pay and you’d be done in less than 3 years.
It’s pretty rare but it can happen so for most folks it’s anywhere between 3 and 5 years.
Who Qualifies For A Chapter 13?
Anyone with regular income can qualify for Chapter 13 bankruptcy, it’s a good kind of bankruptcy to do for people who make too much money for Chapter 7.
Remember in Chapter 7 you have to qualify by being under a certain income limit, whereas in Chapter 13 it’s not a qualification issue, but if you make over means so you don’t qualify for that Chapter 7 you’re kind of forced into Chapter 13.
It’s also a good sort of bankruptcy to file for people who have had Chapter 7 discharge within the past 8 years, then you might turn to Chapter 13.
It’s a really good strategic financial tool if you have fallen behind on mortgage payments, on tax payments, on child support, or alimony, but the court looks at what is feasible, in other words, do you have the ability to make an ongoing monthly payment to the Chapter 13 after we consider your monthly expenses and everything that you need to pay on a regular monthly basis.
Can I File Chapter 13 Alone?
It’s actually a good idea to hire an attorney but in reality, anybody can file any kind of bankruptcy without an attorney. This is called filing pro se (“pro-say”), in fact, the Western District of Texas website has a whole section called filing without an attorney
In fact, we’re required to give you a notice stating you don’t have to have an attorney to file any kind of bankruptcy, you can always do it on your own.
While it is indeed possible, it is not recommended! Applying exemptions to protect your property, and drafting a plan correctly can be tricky, and if not done correctly, your belongings may be at risk of liquidation by creditors, or your case may be dismissed by the Court. In fact, not every bankruptcy attorney will file a Chapter 13 as part of their bankruptcy practice. This is entirely understandable, since Chapter 13 plans can require specialized knowledge about how they are calculated, and require vigilance over a case for up to (5) years.
It’s not a great idea to file without an attorney.
If people are concerned about the cost of filing with an attorney, oftentimes your Chapter 13 attorney representing you will wrap most of their attorney’s fees into that Chapter 13 plan, so you don’t have to come up with all the money at once, and that can help a lot of people.
If you don’t calculate your plan correctly that ends up being very bad, if you’re overpaying nobody’s going to complain, if you’re sending in too much money, whenever that happens nobody’s going to complain, but there are lots of different things you have to factor in, including the trustee gets a percentage of that plan payment.
You have to make sure that you’re paying everything like your taxes, if you’re behind on any taxes or some kinds of payments, you have to factor in an interest rate and when you do that then you want to look at a good amortization calculator.
There are all kinds of different rules for all kinds of different debt, and then you need to calculate it very accurately.
Chapter 13 trustee works with us, we go back and forth on those calculations but generally, you want somebody who knows what they’re doing.
What Is A Dismissal Of Chapter 13?
A dismissal is basically to get kicked out of court, a case might get dismissed if for example those monthly plan payments haven’t been made in a while, but sometimes a case can get dismissed if certain forms haven’t been filed or scheduled with the bankruptcy itself haven’t been filed or haven’t been filed correctly.
You have to file your pay stubs with the court, so if you miss that little detail your case can get dismissed.
A case might get dismissed for some kind of non-compliance with some rule or some payment.
When a case is dismissed, then, the automatic stay is lifted.
We’ve talked before about the automatic stay, and the automatic stay lasts only as long as the bankruptcy lasts until it’s lifted, and that means that your creditors can start collection again.
If you filed Chapter 13 to stop a foreclosure and your case is dismissed, then that foreclosure goes right back into action or a lawsuit.
In the case you had a lawsuit filed against you, they can start pursuing the lawsuit again or even those annoying collection calls that you might be getting, once the case is dismissed, they can start calling you again to ask for collection.
How Long Does Chapter 13 Stay On My Credit Report?
Just like with court judgments, any kind of bankruptcy will stay on your credit report for 10 years which sounds daunting, that doesn’t mean that it affects your credit score for 10 years necessarily.
We’ve often used the phrase that filing bankruptcy is not a financial death sentence, it doesn’t mean that you’re starting from zero for the next 10 years, you can rebuild your credit after the bankruptcy and very quickly.
It’s going to be there for 10 years but over a period of time it becomes less and less and less important so that you can rebuild your credit, you can borrow money, you can buy a house, you can buy a car with you with not a horrible interest rate, but it does stay on there for a period of time
Chapter 13 Fail Rates: What Happens If I Stop Paying My Chapter 13?
If you’re filing on your own there’s a big fail rate, and that’s another reason you want to file with an attorney, it is still a high fail rate, that’s a 33 percent success rate which isn’t great.
One of the qualifications that we’ve been talking about is the Chapter 13 plan, it requires a regular monthly payment, but remember we’re doing this for up to 5 years.
Think about all that happens in life over a period of 3 to 5 years, you might get laid off from a job, you might have a new mouth to feed under the roof, you might have some medical bills that cannot be added to the bankruptcy because they were incurred after you filed bankruptcy, and that might make it really difficult to make those monthly plan payments.
The number one reason that Chapter 13 plans fail is that the people in bankruptcy are unable for whatever reason to continue making those plan payments.
What Happens If Someone Stops Making Their Chapter 13 Payments?
Ultimately their case can get dismissed and then, they’re back to the drawing board with paying for those debts, facing foreclosure, facing eviction, whatever it might be.
If you are filing with an attorney and if you have stopped making your plan payments, you want to contact your attorney right away, because the dismissal doesn’t happen immediately.
They’ll usually give you a couple of months to figure out what exactly is going on, was there a miscommunication, because things can happen, but if you’re filing with an attorney and you’re really going to miss a couple of payments, then your attorney could make some suggestions on how to catch up on those missed payments.
Nothing in the courts happens quickly, so you can buy yourself a little bit of time that way, but catching up on missed payments is always more expensive than making those monthly payments on time.
If you know that you’re going to have a reduction in income for example, or if you’re going to have another family member in your household that you have to support, talk with your attorney because all kinds of solutions are out there.
A well-experienced attorney will know all the different tools in the toolbox to how to address that, maybe in a certain circumstance you might be able to lower your plan payment rather than missing it entirely, or you can miss a month or two and catch up on the back end, or sometimes if you filed before the Covid pandemic hit, you might be able to extend your plan to keep plan payments low.
There are lots of different things that can happen if you’re having a temporary hardship during your plan.
Can I File A New Bankruptcy With A Failed Bankruptcy?
Absolutely, if you cannot make your plan payments, and then let’s say your case gets dismissed, in most cases you can turn around and file another case.
It’s important to keep in mind that with each new case, the court might give you less and less wiggle room, less and less grace if you fall on hard times during bankruptcy.
For example, yesterday we were in a hearing with a bankruptcy judge, and this wasn’t our case, we were listening to somebody else’s case and one of the questions that came up was if somebody was having some short-term hardship, has this person filed bankruptcy before? In other words, is this their first bite at the apple? Do they kind of know what’s going on or is this really something that they do habitually?
So, this person had not filed bankruptcy before and the court was really more willing to give them a second chance and to catch up on those plan payments.
If you file too many Chapter 13s in a row, the court might consider it an abuse of the system, that makes them think that you just keep filing the bankruptcy and then you keep getting the automatic stay, you are just using the system, you have no intention of making any kind of payments to your creditors.
A court has the discretion to issue an order that restricts you from filing another bankruptcy for a period of time like you know we’re going to dismiss your case and there are going to be no more bankruptcy filings from you for 6 months or 12 months.
It’s really best if you can keep your current bankruptcy alive to try to do that, but in most circumstances, you can file again, you just want to be very careful with how you do that.
Is Chapter 13 The Same In All 50 States?
The laws have to do with what Congress puts in place in our Federal Congress, so in general, it’s pretty much the same in every state.
We have worked with Chapter 13 in 4 different states for different jurisdictions and the most part it’s the same.
What’s different though is that every jurisdiction has its own local rules, sometimes they have their own forms that each district prefers, how you go about doing things and what forms you use.
In certain circumstances, it will be different not just from state to state, but from district to district.
Anything in the Western District of Texas might be completely different from the Eastern District of Texas, everybody’s different, for example, the Western District of Texas and Austin use their own form for the Chapter 13 plan.
There is a national forum available that a lot of jurisdictions use, but in Texas, Austin Division has decided that they like their own local form and so that’s what you have to use when you file that case.
What Are The Risks Of Chapter 13?
Chapter 13 affects your credit less in general than Chapter 7 does because you are repaying some of your debt, but it’s good to know before you file, that it might be more difficult to borrow money or if you’re in bankruptcy in active bankruptcy, it might be more difficult to rent a home, or to be approved for a home loan, it’s not impossible but it’s definitely more difficult.
Does Chapter 13 Stop My Child Support Payments?
If you’re making child support payments, you’re just going to continue making those payments, you have to be current on your support payments and that’s not just child support but spousal support too.
Domestic support obligations are the bankruptcy term for it, you have to be current by the end of the Chapter 13 plan to reach a discharge of your debts.
There’s actually a certification that you have to file within one month of ending that plan, stating that you are current on all support obligations, if you’re not current you don’t get a discharge.
If you’re on the receiving end of domestic support, then it’s still considered monthly income, and your monthly income is what is used to calculate your monthly plan payments.
We’ve had clients tell us well it’s not taxable income so we are not going to report it, and it’s good to remember that tax laws and bankruptcy laws are completely different sections of the code, so just because it’s not taxable income it doesn’t mean that it cannot be considered in bankruptcy calculations or bankruptcy matters, you have to report all of your income.
Does Chapter 13 Help With Student Loans Or Regular Loans?
Student loans that you already have are not impacted, particularly if they’re federal student loans you will still be required to pay those back, they’re very difficult to discharge.
We won’t say they’re non-dischargeable, which is kind of the general thought out there in the public, that bankruptcy will not discharge your student loans, that’s not entirely true.
There are circumstances where bankruptcy can discharge your student loans but in general no, it won’t affect the student loans that you’re paying or that all of us are going to start repaying in May as far as your eligibility to get a loan.
It is going to be harder to take out a loan, bankruptcy scares lenders for good reason.
The other thing that’s important to remember is that if you’re going to borrow money while you’re in Chapter 13 bankruptcy, you actually need bankruptcy court approval, so if you need to take out a loan to buy a car, then, there’s a form that you fill out and the trustee will have certain parameters for how you’re going to borrow that money.
You can get approved for a car loan while you’re in bankruptcy, you just can’t do it all on your own without telling anybody you have to have court approval to borrow any money.
How Do Changes In Income Affect Your Chapter 13?
It’s easier if it’s locked in, but like we were saying, life happens during that period of 3 to 5 years that you’re in bankruptcy.
The rule of thumb is that if your income has changed or increased by 10 percent or more you definitely need to report it, and in fact, you have an ongoing obligation to report major changes in your income.
If you get a higher paying job you’re supposed to report that and then the trustee can require that you also increase your plan payment, but this is another good reason why you want to have an attorney because let’s say that you get a higher paying job 4 years into your five-year plan.
The expenses that you filed 4 years ago might not be relevant anymore, maybe now you have a teenager who’s driving so your insurance has gone up, or maybe now we’re facing some inflation, maybe your grocery bill has gone up, so one of the things that we look out for is that while we are reporting our client’s increased income, we really do want to take a hard look at what their expenses are, have they changed and will those expenses now counteract, what some of that income is.
If you have a spouse who hadn’t worked previously but now they go back to work, in all likelihood food budgets going to go up, their clothing budget is going to go up because they’re back in the workforce so they need to have professional clothing, your transportation budget is going to go up because now they have a commute every day, oil changes are going to go up, insurance is going to go up because they’re driving more miles per year.
That’s the kind of thing that a good bankruptcy attorney is going to look at, they really want to protect you.
We at Lincoln-Goldfinch Law, bankruptcy & immigration attorneys, are charged with the zealous representation of your best interests, we’re not gonna do anything immoral or illegal but we will definitely help you look out for it for the best-case scenario for you.
How Does Chapter 13 Affect Tax Returns & Refunds?
The tax return is just the form that you fill out, and sometimes people call the refund the return.
The refund is the money that you might be getting back, so as far as filing the actual return the 1040 form that you fill out, no, being in Chapter 13 there’s no deduction for it or anything like that, it’s not going to change anything about how you file.
However, it could affect your return in that depending on what your plan says, you may be required to turn over all or part of your refund every year so it goes back to your creditors.
If you’re used to getting an $8,000 or $9,000 refund, you can pretty much bet that a big chunk of that is going to go to the trustee, and then you might want to just change your withholding at work so that you’re not getting as big a refund.
As long as you’re in bankruptcy the trade office doesn’t make you get a big chunk of money every year that you get to hold on, and for example, go to Disneyland with it.
The exception to that is that if you have a significant and necessary situation where you need that money you’re counting on, that $8,000 to pay for a medical procedure or your roof is caving in, and you need that refund to help pay for that new roof.
Then, as long as you ask your attorney to go to the court with those details, often you can get some kind of exception for that, but it has to be documented, has to be necessary, it can’t be a flight to the Maldives for the next month, for example.
At Lincoln-Goldfinch Law, your legal team not only does Chapter 13 bankruptcies, but we really enjoy them! We like the challenge of fitting the puzzle pieces together, the math involved in the plan calculation, and working with the Chapter 13 Trustee’s office. But what we love the most is that we get to build relationships with our clients over the span of years. A lot of life can happen in 3-5 years: babies get born, family members pass away, children go to school, jobs change, moves happen, cars get wrecked and new cars need to be purchased. We want to be with you during these life-changing moments so that we can help you achieve your financial dreams. As much as it helps our clients, we find it very rewarding.
In case you have additional questions about your debt, Chapter 13, or your specific case, you can contact us at (855) 502-0555. After a short 10 minute evaluation of your case over the phone we will let you know what options you have. You can also follow us on our social networks so as not to miss our weekly transmissions via Facebook, YouTube & Twitch.
Frequently Asked Questions About Chapter 13
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“In what was probably the most difficult point of my life Lincoln-Goldfinch was able to guide me through the tough decision of getting out of debt through a chapter 7 bankruptcy. After considering all options of debt management/consolidation/ settlement and reaching out to numerous lawyers and agencies Lincoln-Goldfinch spent the most time with my initial consultation and made me feel like I was really listened to and not just a statistic. Amy Wilburn was wonderful every step of the way in being available to answers all my questions and put my mind at ease. My case was dismissed successfully and I am now living such a better quality of life after learning a stern lesson in life of fiscal responsibility. I recommend the team at Lincoln-Goldfinch 100% if you find your self in need of quality representation.”