24725 W. 12 Mile Rd., Ste. 304 Southfield, MI 48034 T (248) 246-1166 E info@maxwelldunnlaw.com W maxwelldunnlaw.com Understanding how chapter 13 bankruptcy works: Creating a plan for dealing with unique financial challenges. I am often asked if a chapter 13 bankruptcy is better than a chapter 7 for getting out of debt. My response is that it depends on their particular circumstances. A chapter 13 bankruptcy allows you to keep the things you own and pay back all or a portion of the debt that you have based on what you can actually afford. Anyone who has a regular source of income - whether from employment, self-employment, government or family assistance - is eligible to file a chapter 13 bankruptcy case. If your income is irregular or if it s not enough to pay your basic and necessary bills (i.e. rent, insurance, mortgage, utilities, etc.), a Chapter 13 bankruptcy is probably not the right type of bankruptcy for you.
The idea behind a chapter 13 bankruptcy is pretty simple and is based on your household budget. We look at your budget and figure out what you have left over each month after paying all of your basic and necessary bills. We then take what you have left over each month and use that number to build a repayment plan. The plan allows you to pay a portion of your debt over time. You can have up to five years to pay back a portion of what you owe and when you finish paying your repayment plan, anything that hasn t been paid back is discharged. As long as you make all of your plan payments on time you won t owe anything else after your case is over (except for things that you agree to continue paying after the case such as a mortgage). There are a few types of debt that can t be discharged, but if you have that kind of debt your attorney will tell you before you ever file your case. As you can see, a chapter 13 bankruptcy requires you to pay back at least a portion of what you owe. This is certainly different from a chapter 7 bankruptcy that does not require any repayment. Sometimes, paying back some of what you owe is actually better than discharging all of your debt in a chapter 7 bankruptcy. To understand why, you need to know that there are ways of adjusting the debt in a chapter 13 bankruptcy case that you simply cannot do in a chapter 7 bankruptcy.
For starters, let s assume that you actually qualify to file either a Chapter 7 bankruptcy case or a chapter 13 bankruptcy. Not everyone qualifies to file a chapter 7 bankruptcy. When the bankruptcy law was re-written in 2005, it became much more difficult for people to qualify to file a Chapter 7 bankruptcy. This is especially true if you own anything that has a lot of equity or if your income is higher than average (bonuses and consistent overtime could disqualify you). For our purposes we will assume that you could file either type of case. Below are a few examples of what you can do in a Chapter 13 that you wouldn t be able to in a Chapter 7. 1. A chapter 13 bankruptcy IS A GUARANTEED WAY TO STOP A FORECLOSURE. If you are in danger of having your home foreclosed by your mortgage company or the treasurer for nonpayment of real estate taxes, a chapter 13 bankruptcy will prevent the foreclosure from happening. 2. If you have a car note with a high interest rate, you can modify the interest rate on your loan to a reasonable rate of interest (we usually are able to modify the rate from anywhere between 3.5% and 6.5%). This could mean HUGE savings for you. 3. If you have more than one mortgage on your house and your home is worth less than what you owe on the first mortgage, we can literally get rid of your second mortgage in a chapter 13.
4. If you owe taxes to the IRS (or State), we can discharge older taxes through the chapter 13 bankruptcy plan of reorganization and stop additional penalties from accruing. The Chapter 13 plan can also result in the elimination of huge penalties from your tax debt. 5. If any of your creditors have filed liens on property you own, a Chapter 13 plan can result in removing liens and payoff of the liens through the plan at a reduced amount. 6. Any garnishments or that may have been placed by the IRS or by the State of Michigan are immediately stopped and the tax obligation is dealt with through the chapter 13 plan. 7. If you are behind on your rent, you can use a chapter 13 bankruptcy to prevent an eviction and catch up the past due rent over time. 8. A chapter 13 bankruptcy does not have as great an impact on your credit score as a chapter 7 bankruptcy does. Generally speaking, a chapter 7 bankruptcy results in around a 100-200 point drop in your FICO score whereas in a chapter 13 bankruptcy the drop in your credit score is usually less than 60 points. Also, a chapter 13 bankruptcy case is only reported for 7 years as opposed to a chapter 7 bankruptcy case, which is reported for up to 10 years. 9. During the course of your bankruptcy case, your creditworthiness will improve and you will qualify for car loans during the case. 10. A chapter 13 bankruptcy can be adjusted to fit your lifestyle. If you lose a source of income or your income decreases, the plan can be
adjusted. If you suddenly get an increase in your income, we are able to adjust your budget and possibly amend your plan to allow you to finish your case sooner. 11. Student loans can be consolidated through a chapter 13 bankruptcy plan. If you are behind in your student loan payments, the payments can be brought current and can actually be paid off through a chapter 13 bankruptcy plan. 12. If a family member or friend has co-signed for a secured debt (mortgage, car loan, etc.), a chapter 13 bankruptcy can also protect the co-signer from any collection efforts by the creditor. 13. For business owners that have personally guaranteed the obligations of their businesses, a chapter 13 can help you keep your business open while restructuring some of the obligations of your company through a personal bankruptcy. This includes dealing with trust fund recovery taxes as well as other priority 941 tax issues that you may have. Always keep in mind is that a chapter 13 bankruptcy is based on your budget. It is designed to allow you to reorganize your debt by using the money you have available each month to pay back what you can afford. Your chapter 13 plan uses your disposable monthly income to repay your creditors as opposed to the equity in any assets that you may own.
When deciding which type of bankruptcy case you should file, also consider the amount of debt that you actually have. If you only need relief from high interest rates and the high monthly payments required on your credit cards, a chapter 13 plan can immediately reduce those high monthly payments and possibly allow you to REPAY ALL OF YOUR CREDITORS AT 0% INTEREST. In certain instances, we don t recommend bankruptcy at all. We have several programs that allow you to create a plan outside of bankruptcy that allows you to repay your debts without ever having to file a case. Business owners may find that a chapter 13 bankruptcy case will allow them to keep their business open while using the bankruptcy to restructure loans and other obligations that the owner has guaranteed for the business. This includes changing interest rates on loans, repaying certain vendors, and paying past-due taxes. The bottom line is that there are certain circumstances when a chapter 13 bankruptcy is simply the better option. It gives you more effective debt relief than a chapter 7 ever could. Call Maxwell Dunn Law today for your risk-free assessment and see what options may be available to you.