One of the most misunderstood areas of bankruptcy is chapter 13 bankruptcy
. Potential clients come into my office telling me that they do not want to file chapter 13. It is not that debtors in bankruptcy are completely against paying back their debt, it is simply a misunderstanding about what chapter 13 entails. For many debtors, chapter 13 is the only option. In 2005 bankruptcy reform made chapter 7 far less available to people who earn more than average in their state. A debtor whose debt is primarily consumer in nature (meaning non-business related) must be subjected to the "means test"
and if the debtor does not "pass" the means test, a chapter 13 may be their only option. The means test calculates debtor's disposable income by subtracting debtor's necessary expenses (some pre-determined by IRS standards) from all income received by the debtor in the six months prior to bankruptcy filing. If from the calculations, debtor appears to have disposable income (a positive number), then the debtor will not be permitted to file chapter 7 and must choose an alternate solution to debt relief. Chapter 13 is usually the next best thing. Debtors who have filed a chapter 7 within eight years and received a discharge are not eligible to file another chapter 7 until eight years from their prior filing, however they may file a chapter 13 in most cases. When a debtor hopes to qualify for chapter 7 but cannot, they are initially disappointed. Once they learn how chapter 13 works, they are usually relieved. Most people who are contemplating bankruptcy
and who do not qualify for chapter 7, have income that, without their monthly debt payments, is more than adequate to sustain a comfortable lifestyle. In a chapter 13 a debtor is typically not required to pay back all of their debt. They are required to pay only what they can afford after they pay all of their reasonable and necessary expenses for a period of five years. Once all plan payments are made, all remaining debt is discharged (with the exception of non-dischargeable debts). In most cases, the debtors who don't qualify for chapter 7 because of their higher income, find that they can create a budget that allows for expenses they were previously unable to pay when they were slaves to the credit card companies. Without having regular credit card and other debt payments
sucking all of their income, they are far more comfortable. The chapter 13 plan payment is typically what is left over after all living expenses are paid. While most debtors in chapter 13 do not have budgets that allow for nightly fine dining and elaborate vacations, some find that if they pare back on their budgets, there is room for some recreation as well as an occasional night out. Other people file chapter 13
to save their home from foreclosure. People who have tried to work with their mortgage companies when hard times hit, but had no luck, often turn to bankruptcy to help save their homes. Chapter 7 can do nothing to save a home from foreclosure (though it can temporarily delay a foreclosure). Chapter 13 can be used to pay mortgage arrears over a period of up to five years. The chapter 13 filing will stop a foreclosure
and a properly proposed plan will prevent the foreclosure and allow a debtor to cure their mortgage while making regular mortgage payments in addition to payments through a chapter 13 plan. If you have been told chapter 13 is your only option, come for a free consultation with Greenwald & Hammond
to see how a chapter 13 would work for you. Many clients are surprised by how low their monthly plan payment can be. Submitted by: Mindy Greenwald, Esq.