Chapter 13 bankruptcies are called so, because it is found in chapter 13 of the United States Bankruptcy Code. The Bankruptcy Code is found in Title 11, United States Code. Chapter 13 is called "reorganization?, because it involves a reorganization of the financial commitments of the debtor, who files for chapter 13.
Since chapter 13 involves financial commitments of the debtor, it Chapter 13 is made for individuals and married couples, who need some debt relief, and who have steady monthly income with which to pay debts under a reorganization plan, although most married couples file chapter 13 together, there is no mandate that they do so. One is not liable for a debt of another, simply on the basis of marriage. Each person owes his or her own debt. However, in most cases the married couple has joint debts by way of them both signing the contract, or promising to guarantee the debt in some fashion. Because a chapter 13 involves a reorganization of financial commitments, it usually involves joining all family debt together to attempt to resolve the debt over load.
In other words the family has "disposable income?. Disposable income is defined as that surplus left after paying normal and basic necessary expenses on a monthly basis. In chapter 13, unlike in chapter 7, there is disposable income that can be used to pay creditors, once the payments to those creditors are reduced in the chapter 13 plan. For example, a family may be struggling to pay all of its debt each month, because of some unforeseen circumstance, such as a temporary loss of employment, or temporary health problems. The problem also may have occurred simply by the fact that the family debt has gotten out of hand. A chapter 13 allows them to catch up back payments on their home mortgage debt, reduce monthly vehicle payments, and reduce unsecured debts by a reduction in monthly payments, and/or a reduction in the balances due. The balance due on a mortgage secured by a family's primary home cannot be reduced as part of a chapter 13 bankruptcy. However, as stated above, a chapter 13 will allow the debtors to "cure? (i.e. catch up) the "arrearage? (i.e. back payments) on the mortgage.
A vast number of chapter 13 cases are filed to stop a foreclosure of the family home. This can be done even if the foreclosure has already begun. The filing of any bankruptcy case immediately invokes an "automatic stay? (i.e. federal injunction) prohibiting the foreclosure suit from going forward. It also prohibits creditor harassment, other law suits, repossessions, wage garnishments, and other creditor action. In fact a creditor is prohibited from contacting the debtor after a bankruptcy case is filed. Being free of creditor actions allows the debtors and their lawyer to fully discuss options, and a plan going forward.
The chapter 13 "plan? is prepared by the debtors' lawyer with the help of the debtors, who answer questions, and provide documentation. This documentation involves the debtors' assets (i.e. property), and the debtors' liabilities (i.e. debts). In any bankruptcy case the lawyer has 60 to 80 pages of paperwork to fill out. This paperwork is called the bankruptcy "schedules.? Besides the schedules, a chapter 13 also includes the preparation of the debtors' repayment plan. Once all the paperwork is filled out and reviewed by the debtors and their lawyer, the lawyer and his or her paralegal electronically file the paperwork with the Bankruptcy Court. Within days thereafter, the Bankruptcy Court mails the official notice of the bankruptcy case with a case number, and instructions to all the creditors that the debtors listed. It is extremely important to list all creditors so that the federal injunction applies to them. After all if a creditor is not listed, it would continue actions against the debtor, due to its not having been made aware of the bankruptcy filing.
The following is a typical chapter 13 plan, and I use as an example a family of five:
|Total monthly net "take home? pay||$5,833|
|Home mortgage payment||$1,200 (debtors are 4 months behind)|
|Equity line mortgage payment||$400 (debtors are 6 months behind)|
|One car payment||$425|
|Other car payment||$475|
|Unsecured debt payments||$800 (total credit card and medical debt $92,000)|
|Monthly payments toward arrearage||$300 (creditor insists on catching up in 24 months)|
|Total monthly debt obligations||$3,700|
By simple math this leaves $2,133 per month for all other basic and necessary living expenses, which is insufficient for a family of five. Note also that, although I show the mortgage companies working with the debtors to allow them to catch up mortgage arrearage, this in reality seldom occurs. The standard is that once a debtor is three payments behind on a first mortgage, the lender commences a foreclosure law suit, and refuses to take future monthly payments, unless the debtor catches up all payments, late fees, attorney's fees, costs, etc. The debtor finds this impossible to do, and, therefore, seeks relief via a chapter 13 bankruptcy reorganization.
This family's chapter 13 plan would look like this:
|Home mortgage payment||$1,200 (cannot be reduced)|
|Equity line mortgage payment||$400 (cannot be reduced)|
|One car payment||$325 (as reduced in plan)|
|Other car payment||$375 (as reduced in plan)|
|Furniture payments||$50 (as reduced in plan)|
|Unsecured debt payments||$395 (as reduced in plan)|
|Monthly payments toward arrearage||$120 (as reduced in plan)|
|Totally monthly debt obligations||$2,865|
Therefore, in this hypothetical example, this family reduces its monthly debt obligations by $835 per month. This is made possible by the fact that monthly payments, interest, and balances have been reduced on non mortgage debts as allowed under the Federal Bankruptcy Laws. Obviously, therefore, not all of the debt owed under the various contracts is paid in full in a chapter 13. This is true. However, these balances are discharged (i.e. forgiven), once the debtors complete their chapter 13 plan. In our hypothetical case, this family will be free of debt in 60 months with the exception of their two mortgages. In fact, it could be free of the equity line (second mortgage) if that balance at the start of the chapter 13 does not exceed $20,000. For certain the family receives considerable relief, and will be almost debt free in five years from the start of their chapter 13 reorganization.
Benefits of Filing a Chapter 7 Bankruptcy at The Cooper Law Firm
In representing thousands of families and businesses over the past 22 years, we at The Cooper Law Firm understand well that with financial relief comes peace of mind, better physical and mental health, a healthier marriage, and a brighter future for all. Should you, a family member, friend or co-worker find that debt has become overwhelming, we would like to help. Therefore, feel free to contact us for a free initial consultation.
Robert H. “Bob” Cooper