Chapter 13 Bankruptcy: Repayment of Some Debt
Chapter 13 allows a debtor to repay debts based on disposable income. It is for individuals with regular income wish to avoid the trustee selling assets to pay debts. It allows the debtor to pay in installments over a period of time based upon ability to pay. Debtors can qualify for chapter 13 as long as their debts are not too large. If debts exceed the amount allowed by the bankruptcy code the debtor must proceed under Chapter 11 or Chapter 7. Chapter 11 costs more and takes more work. Chapter 7 may result in the sale of certain assets to pay creditors.
Bankruptcy Trustees in Chapter 7 cases sell assets to pay creditors. Debtors wish to keep these assets file Chapter 13. Bankruptcies under Chapter 13 allow debtor’s to keep assets. In Chapter 13 the debtor must pay creditors at least what they would receive in a Chapter 7 Bankruptcy.
Chapter 13 also allows reduction of certain claims on property pledged as collateral. This ensurs that the debtor will pay only the fair market value of an asset. Thus promoting paying creditors what they would receive in a Chapter 7 Bankruptcy while giving the debtor a fresh start.
In Chapter 13 the debtor prepares a repayment plan using present day earinings and IRS approved expenses. Disposable income is used to fund the repayment plan. Disposable income is the debtor’s present income less IRS approved living expenses. Present income equals the debtors average income over the prior six months. The repayment period is a minimum of three (3) years and a maximum of five (5) years. The court approves the repayment plan. Once the Court approves the plan creditors must accept it.
Successfully completing plan payments results in discharge of remaining debt. For example, suppose the debtor owed $100,000 in dischargeable debt and the debtor’s disposable income was $700 per month. The payment of $700 per month for 60 months (5 years) pays off the $100,000. Under this plan, $42,000 in payments to creditors over five years results in relief from $100,000 in debt.
To understand how Chapter 13 works assume that the debtor really wanted to keep a non exempt asset. In this example a paid off vintage automobile worth $40,000. In a chapter 7 the auto would be sold because it is not exempt and the creditors would receive $40,000. This chapter 13 plan is feasible because over 5 years or 60 months the debtor will pay $42,000 into the plan, more than the creditors would receive in a chapter 7. After paying the $42,000, the $58,000 balance of the $100,000 debt would be discharged.
We discussed dischargeable debts in this article. These are debts such as personal loans, credit card debt, medical bills, and other obligations not secured by property given as collateral. Mortgages and car loans are exceptions from discharge because a house or the vehicle given as collateral to secure the loan. Under the law, even though the debtor receives relief and does not have to pay from future income, the property remains pledged to the extent it has value. Other types of debt that cannot be discharged include domestic support obligations arising out of a divorce, student loans subject to certain complicated exceptions, certain taxes, most criminal fines and restitution obligations, debts which are not properly listed in the bankruptcy petiton schedules and certain debts for acts that caused death or personal injury.