One very powerful remedy that financially strapped consumers have is a discharge pursuant to Chapter 13 of the federal Bankruptcy Code. Chapter 13 bankruptcy is so named because it is Chapter 13 of Title 11 of the United States Code. Title 11 of the United States Code is commonly known as the “Bankruptcy Code”. The other types of relief under Title 11 include Chapter 7 (liquidation), Chapter 9 (municipal bankruptcy), Chapter 11 (commercial bankruptcy), and Chapter 12 (family farmer and fisherman bankruptcy). The relief available through Chapter 13 is broad and can be positively life changing for individuals and families who might otherwise struggle with debts for years and not see the end of the tunnel. In many instances, Chapter 13 is the best help I can provide to the clients I represent.
Develop a Plan
So, if Chapter 13 is so good, there must be a “catch”, right? Well, not really. The idea behind Chapter 13 is to develop a personalized plan encompassing the debts you owe. This means that Chapter 13 is a very effective way to deal with home mortgage debts (even if you are past due), automobile debts, tax debts, child support debts, student loans, medical debts, credit card debts and the like. In other words, ALL of your debt. Chapter 13 is not a voluntary negotiation with your creditors. You don’t need their consent to seek relief. Chapter 13 is a court supervised legal proceeding whereby you personally reorganize your finances in the best manner allowed by law. The law requires that you develop a plan to provide for how you propose to re-pay all of these debts. This plan is filed in the appropriate United States Bankruptcy Court and subject to that court’s approval. Since all of your debts must be included, it is important to tell your attorney about all of the debts you owe, even if you dispute the amounts claimed to be owed or perhaps you dispute whether you owe the debt or not.
Categorize Your Debts
Very basically, your debts are classified as either “secured” or “unsecured”. Secured debts are those debts where there is collateral that the creditor can normally take from you if you don’t pay the debt. Common examples include your home mortgage and automobile debt. Sometimes, you may have borrowed money from a finance company or other small lender and used items in your home as collateral. Unsecured debts are those debts with no collateral backing them up. Common examples include student loans, payday loans, medical debts and credit card debt. Some types of debts are labeled as “priority” claims. This usually means that those debts get special treatment in the case. A common example of a priority claim is a tax debt.
Once your debts are properly categorized, you must determine how they will be paid and how much will be paid on each one. As you might imagine, secured debts will usually get better treatment than unsecured debts. Normally, if you are going to keep the collateral backing up a secured debt, you must pay that debt through your Chapter 13 debt plan. In some circumstances, you will not be required to pay the full amount of the debt. In other circumstances, you will be required to pay the full amount of the debt. You also have the option to “abandon” the collateral by surrendering the collateral back to the lender. Any balance left on the debt after subtracting the fair value of the collateral will be treated as an unsecured debt. Sometimes, you can “avoid” the lien on the collateral. This means that you essentially convert that particular secured debt into an unsecured debt with the added advantage that you can keep the collateral. If you have any “priority” debts, these must be paid in full through your plan.
Once you’ve figured out the secured and priority debts, it’s time to deal with the unsecured debts. Unsecured, non-priority debts are the easiest to work with. You will pay a percentage (anywhere from 0% to 100%) of the total amount of all of this type debt through your Chapter 13 plan. In most cases, the amount you pay is determined by your ability to pay (i.e., your current income less reasonable living expenses). The difference between your current net income and reasonable and necessary living expenses like utilities, medications and the like is known as your “disposable income.” If your disposable income is all used up on paying secured and priority claims, then you usually would pay 0% to your unsecured debts. If your disposable income is high enough to permit you to pay some, but not all of your unsecured debts, then you would pay an appropriate percentage of the unsecured debt. In some cases, you may have enough to pay 100% of your unsecured debt.
Chapter 13 plans usually last either three or five years depending upon your circumstances. Any amount of debt that remains unpaid at the end of your plan is discharged; however, there are some exceptions to this and some debts may remain. Once a debt is “discharged”, you no longer have any legal responsibility to pay it. It is permanently erased and you will never owe it or have to pay anything on it.
So, if you are struggling with debt and need some relief, all you need to do is get a competent lawyer and get going. Our lawyers have many years experience in helping people file and complete a Chapter 13 plan. We can help you too.