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Why File a Chapter 13 Bankruptcy?

By Ullian Associates of The Law Firm of Ullian & Associates, P.C. on March 31, 2020

     Chapter 13 is a reorganization in bankruptcy available for individuals.  The debtor will retain his or her assets and propose a three to five-year reorganization Plan to address his or her debts.  You can file for Chapter 13 bankruptcy if you have regular income, your secured debts do not exceed $1,257,850.00, and your unsecured debts do not exceed $419,275.00.  Regular income does not mean that you must be an employee of a company with a set paycheck each week.  However, you need income that you receive on a regular basis so that you will be able to meet the obligations of your Chapter 13 Plan.  If your income fluctuates each week because you work on commission or you own your own business, you can still file for Chapter 13.  A married couple can file one joint bankruptcy petition even if one spouse does not have any income.


      Let us use Joe Indebt as an example.  Joe was out of work for an extended period of time, but now has a new job.  Unfortunately, he is six months behind on his mortgage (his payment is $2,000.00 per month).  His mortgage has a balance of $300,000.00 and his house is worth $325,000.00.  His mortgage company is threatening to foreclose unless he can pay the six months of arrears within 30 days.  Since Joe wants to save his home but does not have access to the $12,000.00 he is in arrears, he is in a difficult situation.  Now that he is working he knows he could pay the $2,000.00 monthly mortgage payment going forward and get caught up on the $12,000.00 he is behind, but he needs time.

      Joe considered several options.  He could try to refinance, but this is not very realistic since his recent payment history is poor and he has little equity in his house.  He could apply for a loan modification with his lender, but there are no guarantees he will be approved.  He could also try to talk to his mortgage company to see if they will allow him time to get caught up on the amount he is behind.  In a Chapter 7 bankruptcy, the bankruptcy judge will allow the mortgage company to foreclose because he is not current on his mortgage payments.  Under a Chapter 13 bankruptcy, however, Joe can stop the foreclosure proceedings and keep his home.  Joe will submit a Chapter 13 Plan, start making the $2,000.00 per month mortgage payments, and cure the $12,000.00 arrearage by making a Plan payment each month to the Trustee of $200.00 for the duration of his five-year Plan. The Chapter 13 bankruptcy option will allow Joe to save his home.


     A common reason that people file for Chapter 13 bankruptcy is to prevent a secured creditor from repossessing an automobile, a boat, or any other secured item which they want to retain.  The Chapter 13 filing will stop all collection efforts and allow you to propose a Plan by which you can repay the secured creditor the money that you are behind over a period of time.  If Joe has a car loan payment of $300.00 per month and is five months behind on these payments, he could file a Chapter 13 and repay the $1,500.00 in monthly installments over the length of the Plan to the Chapter 13 Trustee.


     Chapter 13 can be useful in dealing with the Internal Revenue Service and state taxing authorities such as the Massachusetts Department of Revenue.  Many problems arise because of unpaid taxes.  Once the tax authorities realize that you owe them money, their collection efforts can cause tremendous anxiety.  There is ongoing interest and penalties that are accruing on the owed taxes, which can cause the debt to increase significantly if not dealt with promptly.  In many cases even though the individual has attempted to work out a repayment schedule (which we encourage), a resolution cannot be reached.  One way to handle the pressure and stop the collection efforts by the tax authorities may be to file for Chapter 13 and pay the taxes over a period of time.  The debtor must stay current with post-bankruptcy tax obligations or risk having his or her case dismissed.  It is important to note that you may be charged interest on the amount you are repaying in taxes in your Chapter 13 Plan.


     Many times a debtor will have substantial equity in assets such as a house, a car, stock, or retirement funds.  The person, however, may also owe a large amount in unsecured debts and be unable to keep up with the monthly payments.  This often occurs when a person is laid off from his or her job and lives off credit cards until he or she finds new employment.  In a Chapter 13, the unsecured creditors typically get paid back less than 100 percent of what is owed over an extended period of time without interest.  Any payment made under Chapter 13 to a credit card company or unsecured creditor must be applied entirely to the principal balance by the creditor.  Payments to the Trustee (who distributes the money to creditors) by the debtor are made for the duration of the Plan, and this enables the debtor to keep his or her assets while dealing with the debts.


For more information on Chapter 13 bankruptcy or to schedule your free telephone or Zoom consultation with The Law Firm of Ullian & Associates, P.C., contact us here.

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