Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also called a “wage earners” plan, like Chapter 7 bankruptcy, has the effect of lessening the financial burden of monthly expenses while allowing someone–called a “debtor” in bankruptcy proceedings–to repay some or all of their debts back over time through a structured repayment plan administered by the bankruptcy court via a Chapter 13 trustee. Chapter 13 plans may last three to five years, during which time the debtor makes monthly payments to the trustee while also paying their own living expenses based on a predetermined monthly budget. The payments to the trustee are then distributed to the creditors to pay down the debts. At the end of the payment plan, the remaining dischargeable debts may be discharged just like in Chapter 7 bankruptcy. Plans may also end sooner in some situations.
Read more about chapter 13 issues and procedure on Wartchow Law’s Chapter 13 Blog.
Chapter 13 bankruptcy is used for people with certain needs and interests and also for debtors whose annualized incomes exceed the median income for their state and family size (i.e., the Means Test). Chapter 13 may also be used when a debtor is behind on their mortgage but wishes to save their home and has the ability to catch up on mortgage payments if other monthly debt payments can be reduced. Chapter 13 is generally for people that are temporarily behind but have the ability to earn a wage and pay back some or all of their debts over time and with a more manageable monthly budget.
Repayment of Mortgage Arrears/ Second Mortgage Stripping in Chapter 13 Bankruptcy
One of the most common reasons a homeowner may elect to file Chapter 13 over Chapter 7 is to take advantage of Chapter 13’s utility to repay mortgage arrears through a confirmed Chapter 13 plan lasting three to five years. From the monthly Chapter 13 payment, the Chapter 13 trustee will use those funds to pay certain debts in full, including mortgage arrears and some taxes and other “priority” debts. Any leftover funds received from the monthly payment will be applied to unsecured debt, usually paying it down at a fraction of what’s owed. The key to making a Chapter 13 plan successful to save your home in bankruptcy is your ability to make all your regular monthly living expenses while paying an additional amount for the Chapter 13 payment. The amount of the Chapter 13 plan payment depends on a number of factors and calculations, which an experienced Chapter 13 attorney will be able to compute and explain. It may also be possible to “strip” a second mortgage in Chapter 13 bankruptcy if the circumstances are right and a plan is timely paid and completed.
Bankruptcy attorney Lynn Wartchow can evaluate which form of bankruptcy works under your circumstances. If bankruptcy is not your best option, we can suggest non-bankruptcy alternatives that may be a better fit for you.