CHAPTER #27 Chapter 13 Debt Repayment Plans

All your credit can be paid with one payment to the Court trustee, if you qualify for a Chapter 13 plan. It is possible to consolidate all your outstanding bills into one lower monthly payment, and be protected from credit action during the time you make your payments.

Chapter 13 plans usually run from 3 to 5 years. You can get a rough idea of your maximum Chapter 13 payment by adding up all your bills, dividing by 36 to 60 months. Add 10% to the monthly payment, and the total would be your Chapter 13 payment. This is an over-simplification, and your payment could be less, but this is the basic idea.

Usually, there is no further interest paid to creditors under a Chapter 13 plan. Exceptions to this are cases where you are paying for a house or for a car, or when the creditors could get all their money immediately if you were to liquidate your assets.

Chapter 13 cases are used where creditors must be repaid to protect assets that are not exempt from creditors. You must have sufficient regular income to make a regular Chapter 13 payment that is large enough to satisfy creditors and the Court that must approve the plan.

Since, in most cases, the creditors would get nothing from you, except perhaps their merchandise back, or a wage garnishment, many Chapter 13 cases pay back secured creditors 100%, and other creditors at less than 100%. This is permissible, in order to lower your payments, as long as you use up your discretionary income for the Chapter 13 payment.

In order for your attorney to determine if you can afford to repay creditors at all, it is necessary to do a budget of your regular living expenses. Only if you have money left over, can you propose a plan to repay your creditors by filing a plan under Chapter 13. If you have enough money left over, after paying your regular living expenses, your plan must use that money to pay all creditors 100%.

It is now very rare for anyone to come into to the Law Offices of Peter Francis Geraci with sufficient money left over, after their regular living expenses, to pay all their creditors 100% in 36 to 60 months, in a Chapter 13 case. If they had enough money to do that, they probably wouldn't be seeing a bankruptcy lawyer! Therefore, whether a Chapter 13 or a Chapter 7 petition is better, depends on other factors.

The purpose of a Chapter 7 petition is to get rid of as much debt as possible. You can keep your household furnishings, and pay for a house and a car, as long as they are not worth too much more than you owe on them. If you own a lot of things free and clear, bring a list of assets to the first interview with the attorney. I have never filed a bankruptcy case and had anyone lose anything, unless they weren't willing to make the payments on it, or had anticipated getting rid of it in the first place.

There are some debts that you cannot get rid of, or "discharge", in Chapter 7 or in a Chapter 13. Student loans, or grants, plus extensions, un-filed taxes, income taxes due within 3 years of filing, trust fund taxes, willful injuries, all are not dischargeable in a Chapter 7 or in a Chapter 13 case. Injuries caused by drunk driving and criminal restitution are not dischargeable either.

Chapter 7 cases always cost you less than a Chapter 13 case. You are always proposing to pay more in a Chapter 13 than you would pay to creditors in a Chapter 7. In addition, you are paying up to 9% of every Chapter 13 payment to the United States Trustee as a fee for dividing up your payments and administering the Chapter 13 plan. Therefore, while your payments are lower in a Chapter 13, and most interest is stopped, you have a 6-10% fee to the Chapter 13 Trustee which increases the cost of repaying creditors.

Chapter 13 cases, however, are usually cheaper than paying a bunch of creditors yourself at contract interest rates, and the payment is lower.

While you are repaying creditors in a Chapter 13 case, you may not get new credit without permission from the Chapter 13 Trustee. In a Chapter 7 case, the case is opened and closed within 6 months, and you are free to start fresh and get re-established then. So, there is a quicker fresh start with a Chapter 7 case.

Generally, if you are behind in your mortgage, or have equity in your house that is not exempt under state or federal homestead exemptions, or equity in real estate other than your house, you may be interested in a Chapter 13.If you have little equity in your house, or no house, and just a lot of bills, you will probably want to file under Chapter 7.

A popular question in this regard is "Which is better for my credit, Chapter 7 or Chapter 13?" Both Chapter 7 and Chapter 13 stay on your credit record 10 years. You can get a fresh start faster with a Chapter 7 case. Chapter 13 cases require much more work and knowledge on the part of the attorney, and much more care and money on the part of the client. In my office, Chapter 13 is appropriate for fewer clients, than Chapter 7, because fewer people nowadays have any disposable income left after they pay their regular living expenses, so they usually want to just get rid of their debt and start over. In a Chapter 13, no new credit is permitted until the Chapter 13 is completed and the old creditors have been paid.

Problem: The Peterson's mortgage is 6 months past due, and the mortgage company won't accept payments. This happened because Mr. Peterson was ill, and Mrs. Peterson was not working. Now they are both back to work, but the mortgage company will not accept a payment plan and is threatening to foreclose.

The Peter Francis Geraci Chapter 7 or 13 Solution: If they can start making the regular payments, a Chapter 13 will force the mortgage company to accept the arrears over 24 to 36 months.