What is a Chapter 13 Bankruptcy?

Chapter 13 bankruptcy
A chapter 13 bankruptcy is a repayment plan that can last a few years. The debts remaining at the end of the plan period are then discharged.

After a chapter 7, the chapter 13 Bankruptcy is the most common bankruptcy for an individual or family who are trying to deal with their heavy debt load.

Salcido Law Firm’s attorneys are ready to help you determine whether a Chapter 7 or Chapter 13 bankruptcy is the right one for you.  Email or call us at 801.413.1753 for your free consultation.

Benefits of a Utah Chapter 13 Bankruptcy Over a Utah Chapter 7 Bankruptcy

One of the main differences between a Chapter 13 and a Chapter 7 is that in a Chapter 13 bankruptcy you don’t actually liquidate your debts.  Instead, you enter into a payment plan to pay your debts back.  The benefit of a Chapter 13 bankruptcy is that in most cases you will not be required to pay interest on your debts.  Thus, every payment you make goes straight to the principal.

Another beneficial difference of a Chapter 13 over a Chapter 7 bankruptcy is the time period for which you are able to prevent having to surrender your assets.  In Chapter 7 your non-exempt assets will typically be surrendered and sold within just a few months.  In a Chapter 13 bankruptcy, however, you can hold on to those assets for about three to five years, and assuming you comply with your payment plan, indefinitely.

Everything is Automatically Stayed

One of the great benefits of filing for bankruptcy is what is known as the “automatic stay.”  It requires all of your creditors to stop their collection efforts the moment you file for bankruptcy.  One of our lawyers can explain to you all of the benefits of the automatic stay when you come in for your free consultation.

Is Chapter 13 Right for Me?

A Chapter 13 bankruptcy is typically for those who have constant income and a bunch of non-exempt assets, but have simply falling behind in their debt payments.  It will allow you to hold on to your non-exempt assets so long as you comply with your payment plan.

It is also for those who want to hold on to their house.  Although you will not always lose your house under Chapter 7, a Chapter 13 bankruptcy is generally the route to take if you want to keep your house.

How to Qualify for Chapter 13 Bankruptcy Protection

Unlike a chapter 7 bankruptcy, a debtor can always qualify for a chapter 13 bankruptcy as long as he or she can afford to make the necessary payments.  There are three factors that go into determining how much a debtor’s monthly payment will be, the means test, chapter 7 liquidation analysis, and budget analysis.

The Means Test

One purpose of the Means Test is to determine if a debtor qualifies for a chapter 7 bankruptcy, basically if a debtor makes less money than the IRS standard of living for a family his or her size then he or she qualifies for a chapter 7 as far as the means test is concerned.  If a debtor makes more than the IRS standard of living then the court may compel the debtor to file a chapter 13 bankruptcy.  The means test also determines what a debtor “should” be able to pay his or her creditors each month based on his or her salary.  So if a debtor makes less than the IRS standard of living then, based on the means test, the debtor shouldn’t have any money left over each month for a monthly payment to his or her creditors.

Now obviously this is all relative and even if a debtor makes less than the IRS standard the debtor still might be in a situation wherein he or she can afford to make payments.  This is why even if a debtor makes less than the IRS standard he or she can still file a chapter 13 bankruptcy.  On the other hand, if the IRS standard of living for an individual filing bankruptcy is $50,000 a year, and the debtor makes $70,000 a year, then based on the means test the debtor “should” be able to pay at least $20,000 a year to his unsecured creditors, which would result in a minimum monthly payment of $1,667.  However, this number can fluctuate drastically based on a debtor’s car payments, mortgage payment, and other “necessary” expenses.  The attorneys at Salcido Law Firm would be happy to sit down with you and go over all the specifics in order to determine what option is best for you.  There is no charge for this initial consultation.

Chapter 7 Liquidation Analysis

Another factor that can determine how much a debtor’s monthly payment is in a chapter 13 bankruptcy is the chapter 7 liquidation analysis.  Basically the court determines how much money unsecured creditors would have received had you filed a chapter 7 bankruptcy, your unsecured creditors must receive at least that much through your chapter 13 payments.  In other words, if a debtor owned a non-exempt vehicle worth $50,000 and in a chapter 7 bankruptcy that vehicle would have been liquidated and unsecured creditors would have received $50,000, then in a chapter 13 bankruptcy a debtor’s unsecured creditors would have to receive at least $50,000.  So if the debtor was in a 5 year plan then his monthly payments to the trustee in that situation would have to be at least $833.  The attorneys at Utah Debt Protection can help you determine what your monthly chapter 13 payments will be based on the chapter 7 liquidation analysis.

Exemptions

Since a chapter 13 bankruptcy is a payment plan rather than a liquidation of assets the exemptions do not play as a big a part, since essentially you can keep everything (with some exceptions) in a chapter 13.  However, the exemptions can come into play in the chapter 7 liquidation analysis.  For instance, if you have a vehicle that has $2,500 of equity then that vehicle would be exempt in a chapter 7 bankruptcy, so when doing the chapter 7 liquidation analysis in a chapter 13, the vehicle would not be a factor.

Budget Analysis

The debtor’s ability to pay is the final factor in determining what he or she must pay each month.  If after reviewing a debtor’s income and expenses it is determined that the debtor does not have any excess money, then he or she will not qualify for a chapter 13 bankruptcy for the simple reason that he or she cannot afford it.  In addition, if based on the means test and chapter 7 liquidation analysis it is determined that a debtor must pay a minimum of $1,000 a month but the debtor can only afford $700 a month, then once again a chapter 13 plan is not feasible.  So even if a debtor technically qualifies for a chapter 13 bankruptcy, it still may not be feasible if the numbers do not add up right.

Should I File a Chapter 13 Bankruptcy Individually or Jointly with My Spouse?

In most instances it makes a lot of sense for a married couple to file together.  There is no extra cost to do so and most of the time the debts are in both spouses names so both must file in order to get the debt discharged.  However, if the debt is exclusively in one spouse’s name then it might make sense for that person to file individually.  If the non-filing spouse contributes to the household income then that contribution will likely be taken into account by the court, so leaving him or her out in hopes of decreasing the yearly income usually won’t work.   Like in a chapter 7 bankruptcy, it usually only makes sense for a married debtor to file individually if the couple was recently married or the debt is completely separate and distinct.

Most married debtors decide whether they want to file individually or jointly before they ever meet with an attorney.  However, the experienced attorneys at Salcido Law Firm will be able to give you and your spouse the pros and cons of filing bankruptcy so that you can make an educated decision.

Except in rare circumstances the attorneys at Salcido Law Firm will be able to tell you what you do and do not qualify for so you know exactly what you are getting into before you actually file your bankruptcy.  Once you have paid the money to file bankruptcy the last thing you want is to be blind sided by an issue that you or your attorney missed.  Salcido Law Firm attorneys have the experience and foresight to know what is coming.  When going down the path of bankruptcy you want to be fully apprised of the situation.

How is Secured Debt Treated in a Chapter 13 Bankruptcy?

As in a chapter 7 bankruptcy, a debtor has two choices when it comes to secured debt, the debtor can either reaffirm the debt and keep the collateral, or the debtor can simply surrender the collateral.  However, there are two big differences between the treatment of secured debt in a chapter 13 bankruptcy versus a chapter 7.

If a debtor surrenders collateral in a chapter 13 bankruptcy then any deficiency becomes unsecured debt, which will be at least partially paid back in a chapter 13 plan.  Deficiency is determined by subtracting the amount the collateral is sold for after surrender from the amount owed by the debtor before surrendering the collateral.  So if a debtor surrenders a vehicle in which he owes $10,000 and the vehicle is sold by the lender at auction for $5,000, then the debtor will owe the difference or deficiency ($5,000 in this case).  Under the same circumstances in a chapter 7, the deficiency would be discharged as unsecured debt.

In addition, if a debtor possesses five cars and owes money on all of them, the court may not allow the debtor to reaffirm all five vehicles.  The court would likely find that five cars is excessive and the money that the debtor is using on payments should be going towards the payment of unsecured creditors.

We Are Your Bankruptcy Law Firm

At Salcido Law Firm we will help you establish your Chapter 13 payment plan so that you can get back on your feet.  Take advantage of a Chapter 13 bankruptcy by calling or emailing us today.