CHAPTER 13 REPAYMENT PLANS
A Chapter 13 Bankruptcy filing is a Plan of Reorganization of your debt which can stop the foreclosure of a house or the repossession of a car. A Chapter 13 Bankruptcy allows you to stop collection actions, foreclosures, repossessions, law suits, etc. The length of the repayment plan ranges from 36 to 60 months to pay back your creditors allowing you to spread out payments to get caught up on your delinquent mortgage payments over time. A Chapter 13 Bankruptcy can also help eliminate most of your unsecured debt. In addition, in some instances, a second mortgage on your residence may be stripped and repayment of a car loan can be based on the value of the vehicle plus interest at the prime rate, meaning you can save a significant amount of money.
Common Reasons to File a Chapter 13 Repayment Plan:
- To stop a foreclosure
- To stop a repossession
- To stop a license suspension for unpaid parking tickets, toll fines, etc.
- You do not qualify for Chapter 7 Bankruptcy because your income is too high or because of prior Chapter 7 filing within 8 years
- If you voluntarily want to repay your debts
Below is an example of a typical Chapter 13 scenario.
A couple is behind on their mortgage and a foreclosure was filed. They are approximately $10,000 behind on their mortgage payments including court costs and attorneys' fees. They do not have any other secured debt such as car payments, but their unsecured debt amounts to approximately $20,000 consisting of credit cards. They fell behind on their mortgage payments because one of them lost their job but is now back to work. Their minimum monthly payments on their credit card debt totals about $800 per month.
A Chapter 13 plan would propose to pay the mortgage company the total amount that they are behind and 10% of their unsecured debt over a 5 year period. The monthly Chapter 13 payment would be approximately $252 monthly for 5 years. Thus, the couple would have to have enough income to pay their regular monthly mortgage, their normal monthly expenses (excluding their credit card payments that are now included in the Chapter 13) and the Chapter 13 payment.
The benefits of the Chapter 13 are as follows:
- The Chapter 13 immediately stops the foreclosure and allows the couple to pay what they are behind to their mortgage company over time;
- The couple will no longer have to make payments on their credit cards and medical bills and the Chapter 13 plan only requires that they pay back 10% ($2,000) of what they originally owed and the remainder will be Discharged once the Chapter 13 plan is completed; and
- The couple will be debt free once the Chapter 13 plan is completed with the exception of the remaining balance of their mortgage and any new debt they incur after the Chapter 13 is filed.
Note that although this is a typical scenario, the length of the payment plan and the percentage required to be payed to unsecured creditors depends on total household income, allowable monthly expenses and the value of unprotected assets. For example, if the couple have equity in their home above the allowable joint exemption amount of $30,000, they will likely have to pay a higher percentage to unsecured creditor depending on the amount of unprotected equity. To illustrate, if they have $75,000 equity in their home, they can protect $30,000, leaving $45,000 that is unprotected. What this means, is that they would be required to pay 100% to the unsecured creditors with about 3% interest to protect the unprotected equity. From the example above, the monthly payment would be $573 monthly. Although they would be required to pay this higher amount, the couple will still significantly save on their monthly expenses because this amount is less than what their monthly payments are on their credit cards ($800 from above) and they would save a significant amount on interest. And remember, part of the $573 is for payment of what they were behind on their mortgage.
Bankruptcy Law is a very complex area of the law whereby both State and Federal Laws are applicable. If you are considering filing for Bankruptcy, please contact our office to schedule a free consultation. Dizon Law Ltd. has over 19 years experience representing Consumers in Chapter 7 and Chapter 13 cases.
We are a Consumer Bankruptcy and Federal Debt Relief Law Firm that counsels individuals seeking relief under the Federal Bankruptcy Laws. We are licensed attorneys in the State of Illinois and before the U.S. District Court for the Northern District of Illinois - Eastern & Western Divisions.