Overview of Individual Debtor Chapter 13 Cases
Why File for Relief Under Chapter 13?
Filing for relief under Chapter 13 provides some advantages that aren’t available when filing under Chapter 7. One of the biggest advantages, and perhaps the number one reason my clients file for relief under Chapter 13, is the ability to save your home from being foreclosed upon by a mortgage company. Chapter 13 allows individuals to stop foreclosure proceedings against their home and then provides them a period of time (up to 60 months) to repay any back mortgage payments. After the back mortgage payments been repaid, then you will be current on your home mortgage again and no longer have to worry about losing your home. Of course, you will still be required to keep paying your ongoing monthly mortgage payment during this time.
Chapter 13 also allows you to change how you are paying secured debts (other than the mortgage on your home) while you are in a Chapter 13. This can allow you to spread out payments owed on a vehicle up to 60 months, even if the normal schedule would require you to pay the entire amount left within a lesser period of time. My clients often find this lowers the monthly amount they are paying on their vehicles, allowing them to free up extra money to repay back mortgage payments or other necessary debts. Chapter 13 also allows you to repay certain tax debts over a period up to 60 months. Chapter 13 provides other advantages as well with certain debts owed due to a divorce. While in Chapter 13, you will not have to worry about being harassed by creditors either.
Eligibility for Chapter 13 Bankruptcy
Under the Bankruptcy Code, only individuals who have a “regular income” are eligible to file for bankruptcy under Chapter 13. These individuals must also have total amounts of unsecured debts and secured debts falling under certain values.
Chapter 13 Is Only for Individuals
The Bankruptcy Code only allows individuals to file under Chapter 13. This means only real people, and not corporations or other legal entities, are eligible to file under Chapter 13.
Chapter 13 Debtors Must Have Regular Income
The Bankruptcy Code requires an individual have “regular income” to be eligible to file under Chapter 13. This means the individual must have income that is sufficiently stable and regular to allow the individual to make payments under a Chapter 13 Plan (We will discuss Chapter 13 Plans later). This means the individual must have regular income of some sort, be it wages, government benefits, recurring payments from a third party, etc. This income must also be enough to allow the individual to afford a Chapter 13 Plan.
Chapter 13 Debtors Must Meet Certain Debt Limitations
The Bankruptcy Code allows individuals to file for relief under Chapter 13 only if they satisfy the the requirements of being an individual with regular income, and also have fixed unsecured debts of less than a certain amount, which as of April 1, 2016 is Unsecured Debt less than $394,725.00 and Secured Debt less than $1,184,200.00. This only applies to “fixed” debts, which means debt amounts which are already known to be owed. This does not include contingent debts where the individual might owe a higher amount if a lawsuit against the individual is successful.
How is Chapter 13 Bankruptcy Different from Debt Consolidation?
Filing for bankruptcy under Chapter 13 allows you to catch up on past due mortgages, car loans, tax debts, and other payments. In addition, you repay your debts through a Chapter 13 Plan payment, so you are given a predictable monthly payment plan. This allows you to budget accordingly.
Debt consolidation is essentially just a new loan that pays off your old loans, and then allows you to get new repayment terms on the new loan. This may work for some people, but for my clients it is often difficult to get workable terms on a consolidation loan when you’re dealing with past-due mortgages, car loans, tax debts, child support, or more. If the debt consolidation involves settlement of any credit cards or other debt, then you must also obtain the creditor’s agreement, which can sometimes be difficult or impossible to obtain.
The biggest (and most important) difference between Chapter 13 Bankruptcy and debt consolidation is that Chapter 13 gives you the protection of the Bankruptcy Code to protect you from continued harassment and creditors that won’t agree. Chapter 13 provides a legal framework that everyone has to work under, which allows you to get an even playing field with your creditors.