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Chapter 13

Brief Description of Chapter 13 Bankruptcy

A Chapter 13 bankruptcy is the kind where a debtor enters into a repayment program under the auspices of the Bankruptcy Court. This type of bankruptcy, more commonly known as a personal reorganization bankruptcy, can last from three to five years. The client would prepare a monthly budget with his attorney. Any excess income (also known as disposable income) goes into the plan for the duration of the plan. The duration of a Chapter 13 Plan is determined by household income. If the client’s household income exceeds the “median income” for a household of his size, then the client would have to file a five year plan. If the client’s income falls below the median income for a household of his size, then the client would file a three year plan.

In addition to disposable income, the client is also supposed to contribute into the plan 100% of any Federal income tax refunds he receives during the plan. However, the client would be allowed to keep the tax refunds as long as he can demonstrate a need for keeping the tax refunds. Examples of such a need could be a household repair or a post bankruptcy filing medical/dental expense. For a free consultation to discuss your inquiries with an experienced Michigan Chapter 13 bankruptcy lawyer, you can call (800) 603-3333 or (313) 417-8422.

Reasons Why A Client Would File for Chapter 13 Bankruptcy

Chapter 13 Bankruptcy usually, but not always, comes into play in one of the following instances:

  1. The client makes too much money to file for Chapter 7;
  2. The client filed a Chapter 7 within the previous eight years;
  3. The client would lose assets in a Chapter 7 but can protect the assets in a Chapter 13;
  4. The client is seeking to stop a foreclosure of his home;
  5. The client is trying to stop a vehicle repossession and/or lower his car payment.
The Client Makes Too Much Money To File For Chapter 7

A client can file a Chapter 7 if he does not have any disposable income with which to repay his debts. Sometimes however, the client could be caught up in a situation where he makes too much money to file for Chapter 7 but does not have enough monthly disposable income to pay the minimum monthly payments required to service his debts. That is when a client would file a Chapter 13, putting his monthly disposable income into the plan. When the plan is over (three to five years later), what is paid is paid and what is not paid the client would not owe anymore except for any unpaid balances on student loans (student loans being non-dischargeable in bankruptcy unless debtor can demonstrate an undue hardship by having to keep the student loans).

The Client Filed a Chapter 7 Bankruptcy Within The Previous Eight Years

A client can only file for a Chapter 7 once every eight years. Occasionally, our Michigan bankruptcy lawyers experienced in Chapter 13 cases see a situation where a client did a prior Chapter 7, but then due to some unfortunate circumstance (such as a pay cut at work) is forced into bankruptcy again. Because the client filed a Chapter 7 within the previous eight years, his only recourse would be to file for Chapter 13. While in this instance a Chapter 13 is not as beneficial as a Chapter 7 would have been, the Chapter 13 provides the client with relief in the respect that he can pay back some of the debt at a monthly payment he can afford while holding his creditors at bay. When the Chapter 13 is over, what is usually not paid the client does not owe anymore (with the exception of any unpaid balances on student loans).

The Client Would Lose Assets In a Chapter 7

The most common reason while a client could be forced into Chapter 13 would be to protect assets that would otherwise be lost if the client filed for Chapter 7. The United States Congress established certain limitations on the amounts of assets a client can protect in bankruptcy in order to obtain a fresh start. For example, a client can currently protect up to $25,150 of equity in his home under the Federal exemption scheme and between $38,225 and $57,350 (depending on his age) under the State exemption scheme. If the client has more than this amount of equity, he would lose his home in a Chapter 7 bankruptcy. A Chapter 7 Trustee would take the house, sell it, pay off any mortgages and/or other liens on the house, give the client his exemption and anything left over would go to the client’s creditors. In order to prevent this from happening, the client would file a Chapter 13 and so long as he pays back to his creditors (over the length of the plan) the equivalent of what they would have received had the house been liquidated in a Chapter 7, then the client would be able to keep his home.

The Client Is Seeking To Stop Foreclosure Of His Home

A client could file a Chapter 13 plan of reorganization to stop a foreclosure of his home due to an arrearage on his mortgage payment. In this case, filing a Chapter 13 stops a foreclosure sale and allows the client to catch up his mortgage arrearages over time to save his home. Every month, the client would have to contribute into the Plan enough money to cover the current monthly mortgage payment and something more on top of that to catch up the arrearage. Usually the arrearage amount, which does not accrue interest once the bankruptcy is filed, is divided by the length of the Plan. (So if the client files a 36 month Plan, the arrearage amount is divided by 36. If the client files a 60 month Plan, the arrearage is divided by 60 months). This monthly arrearage fraction is then added on to the monthly mortgage payment. Every month, the Trustee collects the payment from the client, pays the current monthly mortgage payment plus the monthly mortgage arrearage fraction such that when the Plan is over, the mortgage is current again.

The Client is Trying To Stop A Vehicle Repossession And/Or Lower His Car Payment

Filing for Chapter 13 will stop a vehicle repossession and may allow the client to lower his car payment. The client could lower his car payment by doing something called a “cram down”. If he is unable to do a cram down, the client might be able to lower his vehicle payment by spreading out the balance owed on the vehicle over a longer time, known as a modification.

What is a cram down? A client could owe significantly more on a vehicle than what the vehicle is worth, in which case he would file a Chapter 13 bankruptcy to reduce what he owes on the vehicle. He reduces what he owes on the vehicle to what the vehicle is worth on the day that he files his bankruptcy. This is called a “cram down”. For example, he might owe $10,000 on a vehicle that has a value of $6,000 on the date that he files his bankruptcy. If he financed the vehicle more than 910 days prior to filing for the Chapter 13, he could “cram down” the amount he owes on the vehicle from $10,000 to $6,000, thereby saving $4,000. HOWEVER, he can only “cram down” the vehicle if he had it for more than 910 days prior to filing the Chapter 13 – so this is only a limited opportunity type of Chapter 13.

What is a modification? If the client has had the vehicle for less than 910 days, he cannot cram down the vehicle. In such a scenario, the client might be able to reduce his monthly vehicle payment by spreading out the car loan over a longer time frame. So for example, the client might have 36 months worth of payments left on his vehicle which he has owned for less than 910 days. Without reducing the balance owed on the car, he could spread out the balance on the car loan from 36 months to 60 months, thereby reducing the monthly car payment. This is known as a modification.

Conclusion

Michigan Chapter 13 bankruptcy lawyer, Joseph L. Grima will always meet with the potential client individually and after reviewing the client’s financial situation, advise as to whether there is a benefit to filing a Chapter 13 or not. During the same consultation, he will always be able to advise the client as to what the monthly plan payment would be and how long the plan would last. Consultations are always for free and generally Chapter 13’s will be filed with $0 down on the attorney fee, with the client ONLY being required to pay the filing fee (currently $310) to the Bankruptcy Court. Call Chapter 13 Bankruptcy lawyer Joseph L. Grima at (800) 603-3333 to schedule your free Chapter 13 consultation.

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Dear Joe, This is late in coming but no less heartfelt. Thank you for being such a support during my very long, dragged out bankruptcy. I always knew you would patiently answer all my questions and keep me from panicking. It meant a great deal. Good luck. Judy