What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is a court-protected repayment plan. Under the law, you can have loan agreements modified, and even eliminate some or all of your unsecured debt. It’s not uncommon for people to mistakenly believe that Chapter 13 requires you to repay all of your creditors in full, and with accumulated interest. This, however, is not the case. Chapter 13 allows you to repay only the percentage that you and your family can reasonably afford, which is often nothing for unsecured creditors.
In addition, you may also restructure some secured loans. An auto loan, for example, can often be restructured so you capitalize on a reduced interest rate. In many cases, the principle amount owed on the vehicle can also be adjusted to the current blue book value. If you owe more on your car than it is worth, Chapter 13 might be a good option for you.
How Long Does Chapter 13 Bankruptcy Take?
A Chapter 13 bankruptcy can take anywhere from three to five years, depending on your debt repayment plan. Your payments must be completed within five years.
Additionally, two time-related requirements can add to the length of your bankruptcy. First, within 180 days before you start the bankruptcy process, a certified credit counselor must brief you on managing your finances, analyzing your budget and exploring alternatives to filing. Second, you need to be a resident in the state where you would like to file for at least 90 days before you start the process.
Once you make your final payment under the Chapter 13 repayment plan and complete the required financial management course, you will receive your discharge
Beyond the Basics of Chapter 13
Filing for chapter 13 bankruptcy iS not just a tool–it’s a toolbox full of many tools. It is important to know how to properly use each of these tools to your advantage. Leinart Law Firm has created this useful resource on how to properly utilize the benefits of Chapter 13 bankruptcy.
Pay Important Debts First
Chapter 13 allows you to favor certain creditors over others. This is because the law happens to favor those creditors for various policy reasons. For example, if you are behind on your home mortgage and want to catch up, you are allowed to make monthly catch-up payments ahead of other creditors. Or if you are behind on your child support payments, you would pay those arrears before paying a dime to your “general unsecured” creditors. These unsecured creditors include the ordinary credit cards, medical bills and such.
Perhaps the best example of this is with income taxes, especially if you owe a large amount of back taxes. With a Chapter 13 plan, you are required to pay in full those “priority” debts. These debts would generally not be discharged in either a Chapter 7 or 13 case. With these priority debts you begin to pay them back with a sensible budget but without any more interest or penalties. This can help you get on top of out-of-control debt that keeps growing with interest and penalty.
Save Your Home from Foreclosure
When you file chapter 13, you can stop foreclosure and then get 3 to 5 years to cure your mortgage arrears. You can also potentially strip off any second and third mortgages which have no equity. This will give you adequate time to pay property taxes, protecting you both from the taxing authority and your mortgage lender in the meantime. You can also obtain releases of other liens against your home’s title, either after paying off debts that can’t be discharged like child support or else discharging those that can be, like certain old income tax liens. This is a relief for many families who were afraid of losing their home during a time of financial hardship.
“Cram Down” Vehicle and Other Secured Debts
If your vehicle loan is more than two and a half years old, and you owe more on the debt than the vehicle is worth, Chapter 13 allows you to essentially rewrite the loan to reduce its balance to the vehicle’s value. The interest rate is often also reduced, and sometimes the loan is extended, all of which can reduce the monthly payment amount significantly. The result is often a savings for you of thousands of dollars, and at the end of the case the vehicle is yours free and clear.
This is just a taste of some of the ways that Chapter 13 can help you get back on track financially. Perhaps its biggest advantage is its flexibility. It can help people with all kinds of combinations of circumstances.
Chapter 13 for Curing Child and Spousal Support Arrearage
Chapter 13 is an extraordinary legal tool for protecting you from the aggressive civil law collection methods of your ex-spouse and support enforcement agency, allowing you to catch up while under this protection.
If you are not able to make workable payment arrangements with your support enforcement agency, and you fear that the agency is about to start suspending your license(s) or take other collection action against you, Chapter 13 can be extremely helpful. Chapter 13 stops all of the civil law collection procedures stated above. It gives you three to five years to pay the support payments currently due, as long as you rigorously keep up with your ongoing monthly support payments in the meantime. And throughout this time, most of the very tough collection tools usually available to your ex-spouse or support agency are put on hold for your benefit.
How Chapter 13 Really Works When You Owe Income Taxes
A Chapter 13 bankruptcy will allow you to pay off back income taxes over a three-to-five year period, frequently without incurring any additional interest or penalties, and even sometimes paying less of the tax itself. In some cases, if the taxes are old enough and certain guidelines are met, back taxes may be totally wiped out in a Chapter 13 bankruptcy.
Chapter 13 Gives You Lots of Power against the IRS
Consumers file a Chapter 13 case instead of a “straight bankruptcy” Chapter 7 for many reasons. If you owe a lot of income taxes, the significant advantages that Chapter 13 gives you over Chapter 7 would likely be reason enough. To be clear, Chapter 7 CAN discharge (write off) income taxes that are old enough and meet a number of conditions. However, if you owe taxes for a number of years and/or for recent years, Chapter 13 may be your best option. Under Chapter 7 you are at the mercy of the IRS in dealing with any income tax debts that are not discharged. Chapter 13 gives you some extremely helpful tools for getting control over those tax debts while continuously protecting you from the IRS.
Protection from the IRS
From the moment your Chapter 13 case is filed, you and your assets are protected from the IRS’s collection efforts, up until the time you are tax debt-free. The “automatic stay,” which stops all of your creditors from pursuing you, applies just as powerfully to the IRS (and all other tax authorities). And although this protection is in place in Chapter 7 cases as well, it only lasts about three or four months and generally expires before you even start dealing with the IRS about the debts that were not discharged. In Chapter 13 that protection lasts throughout the three-to-five year case. That’s huge: there can be no threat of garnishment, tax levies on your property, tax liens on your home or vehicle, or phone calls from the IRS throughout that time.
Advantages under Chapter 13
Chapter 13 bankruptcy can handle all of your income tax debts in one tidy package.
You can have three kinds of income tax debts, depending on their age and other conditions.
First, there are those that are old enough, and meet some other conditions, that they would be discharged in a Chapter 7 case. Under Chapter 13 these are lumped in with all your other “general unsecured” creditors — credit cards, medical debts and such — and only paid to the extent that you have available money to do so during the course of your case. Often these are completely discharged (wiped out), with you paying none of these eligible back taxes.
The newer, non-dischargeable taxes are “priority” debts, meaning that the tax itself has to be paid in full during your Chapter 13 case. HOWEVER, interest and penalties generally stop accruing throughout the payment period, which alone could potentially save you thousands of dollars.
You might also have a third category of income tax debt IF the IRS recorded a tax lien. In that case, whatever that lien attached to is in effect collateral on that debt. Chapter 13 often handles these debts much better than Chapter 7 does, because, first, the IRS can’t exercise its lien rights by foreclosing on or seizing your assets. And second, Chapter 13 provides a great mechanism for valuing that lien and paying it off, so that it must be released at the completion of your case.
At the end of your successful Chapter 13 case you would owe nothing to the IRS or any other tax authority, and would usually be debt-free altogether.
Under Chapter 13 you can discharge more debts than under a straight Chapter 7 case.
Way back in the late 1970s when the Bankruptcy Code first became law, Congress wanted to give debtors the incentive to file Chapter 13 payment plans instead of straight Chapter 7s. So the law it wrote permitted the discharge (legal write-off) of many categories of debts under Chapter 13 that could not be discharged under Chapter 7. As a result the discharge of debts under Chapter 13 informally came to be called a “super-discharge.” But over the decades since then, Congress has steadily reduced the categories of debts discharged only under Chapter 13 until now only two are left.
1. Non-Support Obligations Owed to an Ex-Spouse
Two kinds of debts come out of a divorce: support obligation and non-support obligations. You CAN’T discharge child and spousal support either in a Chapter 7 or Chapter 13 case. But you CAN discharge non-support obligations ONLY in a Chapter 13 case, not a Chapter 7 one.
So what are non-support obligations? Not to be flip, but they include all the financial obligations arising out of a divorce (or legal separation) which are not support obligations. They are sometimes called “property settlement” obligations. Most often they are requirements in the divorce decree for one ex-spouse to pay the other as compensation for having received more than his or her appropriate share of the marital property. Sometimes instead of an obligation to pay the ex-spouse directly, it’s framed as an obligation to pay a joint debt or one of the other ex-spouse’s debts—again to even out the split of property.
So these “property settlement,” non-support obligations can be discharged in the Chapter 13 super-discharge.
2. “Willful and Malicious Injury” Obligations
A debt owed for “willful and malicious” injury is one in which the debtor is alleged to have hurt someone or someone’s property intentionally and with at least a reckless disregard for the safety of that person or property. The debt may have already gone through litigation and resulted in a judgment for damages for the injury, or the bankruptcy could instead be filed before that has happened.
A debt for “willful and malicious injury” cannot be discharged under Chapter 7 as long as the injured party objects to its discharge. Section 523(a)(6) makes clear that a Chapter 7 discharge “does not discharge an individual debtor from any debt . . . for willful and malicious injury by the debtor to another entity or to the property of another entity.”
However, such a debt can be discharged under Chapter 13. Section 1328(a)(2) lists the categories of debts that are not discharged in a Chapter 13 case, and that list does not include the “willful and malicious injury” category.
What Exactly Are “Non-Support” and “Willful and Malicious Injury” Debts?
The problem is that these two categories of debt included in the Chapter 13 super-discharge are not at all straightforward in what they cover and what they don’t. “Support” obligations can include those that the divorce decree didn’t label as such, but the bankruptcy court can decide are “in the nature of support.” So a debt that looks like a “non-support” obligation might not be. And the line between injuries that arose out of “willful and malicious” and negligent or reckless behavior is certainly not always clear.
Furthermore, these two discharge categories both tend to involve situations—divorces and personal injuries—which are emotionally intense. The “creditors” may well not take kindly to the debtor trying to discharge the obligation in bankruptcy, and put up a big legal fight.
So the decision to use Chapter 13 to undo part of a divorce decree or to escape accusations of “willful and malicious” injury involve legal, human, and tactical considerations. You’ve got to weigh these carefully with an experienced bankruptcy attorney before trying to rely on the Chapter 13 super-discharge.
Get Started Today
Financial hardships are difficult to face on your own. Rather than spending sleepless nights worrying about what you can do, contact Leinart Law Firm. We can provide you with legal solutions for debt. If there is one thing your creditors can’t take away from you, it’s your dignity. Contact Leinart Law Firm today at 800-518-3328 to schedule your free consultation and evaluation.