Salisbury Law Firm, The Law Firm of Shaw & Crowson, P.A.

What is a Chapter 13 Bankruptcy?

A Chapter 13 Bankruptcy provides you the protection of the Federal Bankruptcy Court while you pay your creditors under a Court approved repayment Plan.

What is the difference between a Chapter 13 and a Chapter 7 Bankruptcy?

In a Chapter 13, you propose a partial repayment plan to repay your debts. Each Chapter 13 Plan is different, depending upon the needs of the Debtor and the financial circumstances involved. In a Chapter 13, you have more control. Your non-exempt assets are not sold unless your Plan provides that you intend to sell them. A Chapter 7 Bankruptcy usually does not provide for any repayment at all to unsecured creditors. But, if you have non-exempt assets, the “Trustee”, who administers your case, has the right to choose whether or not to sell them. The discharge from debt that you receive is different in a Chapter 13 than in a Chapter 7.

How does a Chapter 13 work?

Based upon information and documents you provide, we prepare your Chapter 13 Petition, Schedules, Statement of Financial Affairs, and your Chapter 13 Plan. This is all filed with the Bankruptcy Court. You case is assigned to a Chapter 13 Trustee, who will be responsible for overseeing and administering your case. Your Trustee collects all Plan payments and distributes them to your creditors as provided in your Plan. Once your case is filed, foreclosures are stopped, repossessions are stopped, garnishments are stopped, and lawsuits against you are stopped. All of your financial issues are handled within the Chapter 13. About 30 days after you file your case, you attend a “341” Meeting of Creditors. Creditors only very rarely come. You and your attorney meet with your Trustee to review your schedules and testify that they are accurate. You and your attorney also talk with your Trustee about your Plan and if it will need to be changed. In most Chapter 13 cases, the Plan needs to be amended and sometimes more than once. Your Chapter 13 Plan catches you up on delinquent mortgage payments and past due car payments. State and federal taxes you owe can be paid through your Plan. And your unsecured creditors, such as credit cards and medical bills, get some payment through the Plan. After you file you Chapter 13 case, you must being making your Plan payments and resume making payments to all secured creditors. This includes mortgage payments and car payments. In order to get your Plan confirmed you must sign an affidavit that all “post-petition” secured creditors have been paid all payments which came due after your filing. For your Plan to become official and binding on your creditors, it must be approved by the Court. This is referred to as having your Plan “confirmed”. After your Plan is confirmed, you must continue to timely make all Plan payments and all payments to secured creditors through the term of the Plan. When you have fully paid your Plan and filed an affidavit requesting discharge, you receive a discharge of all debt dischargeable through a Chapter 13.

Who should file a Chapter 13 Bankruptcy?

Homeowners who are behind in their mortgage payments and are facing foreclosure may want to consider filing a Chapter 13 Bankruptcy to catch up on their delinquent house payments. Sometimes a Chapter 13 Bankruptcy is the best way to deal with back taxes. Consumers in debt who have substantial assets to protect can often use Chapter 13 Bankruptcy to deal with their debts and still keep their assets. Debtors who might prefer to file a Chapter 7 Bankruptcy may be required by law to file a Chapter 7 because the “Means Test Analysis” shows that they have enough income to at least partially repay their debts.

What is the “Means Test Analysis”?

The “Means Test Analysis” is a complicated calculation used to determine if a Debtor has the ability to repay at least some of his or her debt. First the annual gross family income is determined based upon what was earned over the preceding six months. Then, that number is compared to the median income in the state based on family size. If the annual gross income figure exceeds the state median income, allowable expenses, mostly based on IRS allowances, are deducted. If the bottom line of all these calculations shows sufficient income available to partially repay creditors a certain percentage of what is due, Federal Bankruptcy law requires the Debtor to file a Chapter 13 instead of a Chapter 7. There are some exceptions to this, but not many.

Does a Chapter 13 stop a foreclosure?

Yes. A Chapter 13 can be the best tool for homeowners who want to stop foreclosure on their home, catch up on their delinquent payments, and keep their home. But, once the Chapter 13 is filed, all payments which come due afterward need to be made on time.

What about my vehicles?

If you are behind in your car or truck payments, filing a Chapter 13 can also stop a repossession. As with mortgage payments, your past due vehicle payments can be caught up through your Chapter 13 Plan. Again, after the Chapter 13 is filed, you are supposed to make your vehicle payments on time when they come due. Sometimes, in a Chapter 13, the amount that you owe on your vehicle can be reduced and your car or truck payment can be paid through your Plan.

What if I need to buy a new car while I am in a Chapter 13?

One of the downsides of a Chapter 13 is that you must get Court approval before incurring any new debt. If you need to buy a new car, you must ask the Court to approve the purchase and the financing.

Does filing a Chapter 13 stop creditor harassment?

Yes. Once you file a Chapter 13, creditors are subject to an “automatic stay”. They cannot continue to garnish your wages, seize your bank accounts, sue you or pursue other collection efforts. Once you have a confirmed Chapter 13 Plan, all creditors are paid in accordance with the Plan terms.

Do I have to put all my creditors into my Chapter 13 Plan?

Maybe. The Chapter 13 Plan must provide for payment of all creditors. But sometimes certain creditors are paid “outside” the Plan. For instance, a car loan could be paid through your Plan or outside your Plan. Part of what your Chapter 13 attorney does for you is to help you decide which alternative is better for you.

So, do I still have to pay 100% of what I owe?

Not usually. If you have so many non-exempt assets that, if you sold them all, you could pay everybody 100% of what you owe, or if you have a very high income, you might have to pay 100% of what you owe. But most Chapter 13 Debtors only pay unsecured non-priority creditors a small portion of what is owed.

What are “non-exempt assets”?

One of the reasons you might file a Chapter 13 instead of a Chapter 7 is that you have substantial “non-exempt assets” you want to keep. For instance, the Maryland homestead exemption is less than $23,000.00. If you have a lot of equity in your home, you might want to file a Chapter 13 to be sure that you will keep your home. General Maryland exemptions total about $11,000.00 per person. If you have personal property worth more than that, you might want to file a Chapter 13.

What are priority creditors?

Depending upon when they were incurred, federal and state taxes are priority creditors. Certain other obligations also have priority, such as spousal and child support. The Trustee’s fees and the fees you agreed to pay your attorney through the Plan have priority. Priority creditors must be paid in full through your Plan.

What are secured creditors?

The lender who holds a mortgage against your home is a secured creditor. The mortgage is a lien on your home. If you don’t pay the mortgage holder, that creditor has the right to take your home from you. The finance company who has a lien on the title to your vehicle is a secured creditor. If you don’t pay your car payment, the finance company can repossess your car. Generally, any creditor who can take property away from you if you don’t pay as agreed is a secured creditor.

What is an unsecured creditor?

Just about everybody else. Almost all credit card debt is unsecured. You may have promised to pay it back, but you did not sign a mortgage on your home or a lien against your vehicle. Medical bills are almost always unsecured. You did not promise the doctor that he could take your car if you did not pay him.

I have student loans. How do I deal with those?

Student loans are a tough issue. Unless there is a very compelling reason, student loans are not discharged in Bankruptcy. Sometimes student loan payments are included in the Chapter 13 Plan while the Plan is in effect (most often 60 months). Sometimes student loan payments are paid as part of your monthly expenses outside the Plan.

Is a Chapter 13 Bankruptcy better than a debt consolidation?

Not always, but often. A Chapter 13 Bankruptcy can allow you to get relief that private debt consolidators can’t. Once your Chapter 13 is filed, no creditor can foreclose on your home or attach your property without a Court order. When you have a confirmed Chapter 13 Plan, creditors must accept what you have agreed to pay under that Plan, which is usually far less than a voluntary repayment plan you can negotiate through a debt consolidator. Most important, when you file a Chapter 13 Bankruptcy, you are protected by federal law. You do not have that kind of protection with private debt consolidators. Unfortunately, many self-advertised debt consolation companies are more interested in getting your money than in helping you save it.

What else should I know about Chapter 13 Bankruptcy?

A lot. Chapter 13 Bankruptcy cases are almost always far more complicated than Chapter 7 Bankruptcy cases. And each Chapter 13 is very different. The only way for you to get the full knowledge you need about your possible Chapter 13 case is to meet personally with an experienced Chapter 13 attorney.

This information is intended to provide basic answers to commonly asked questions about Chapter 7 Bankruptcy in Maryland. It is not intended to be individual legal advice nor is it intended to be the practice of law. This information does not substitute for the advice of your own attorney. You need to consult with your own attorney regarding your own specific legal questions. No attorney-client relationship is established through this presentation.