Filing of a Chapter 13 Bankruptcy may be the answer for those debtors who need time to pay off certain debts and who have a steady income stream sufficient to meet the standards of such a filing. If a debtor's average monthly income during the six months immediately preceding the filing for Bankruptcy is higher than the median income for California residents, their attorney may be required to file on their behalf for Chapter 13 Bankruptcy. The Bankruptcy Means Test further necessitates that a debtor file for Chapter 13 Bankruptcy if his disposable income (i.e., actual income minus actual expenses) would allow for repayment of unsecured debts to his creditors over a fixed period of time.
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Chapter 13 Bankruptcy allows a debtor to repay his debts out of his income rather than by selling his property. Most lawyers agree that a debtor filing for Chapter 13 Bankruptcy need not give up his residence, even if he has nonexempt equity in the home, and may keep all other property in his possession regardless of its actual value. However, the debtor will need to repay his unsecured creditors at least the value of his nonexempt property over the life of the Chapter 13 repayment plan. Chapter 13 Bankruptcy also permits the debtor to spread out his payments of missed installments, taxes, and late charge fees on his mortgage. And, if the lender started foreclosure proceedings on a debtor's home, Chapter 13 Bankruptcy can stop them as long as the home was not yet auctioned off by the lender.
Although Chapter 7 Bankruptcy is simpler, and for the most part, does not require repayment of unsecured debts, there are different reasons why debtors who qualify for both types of Bankruptcy have their attorneys elect Chapter 13 Bankruptcy instead of Chapter 7 Bankruptcy. Chapter 13 Bankruptcy is suitable for debtors with sufficient, reliable income which can fund their plan for a period of 3 to 5 years. Using Chapter 13 Bankruptcy, a debtor facing foreclosure on his home can make up his missed mortgage payments over time by proposing a feasible repayment plan that includes all the missed payments. As long as the debtor stays current on his future mortgage payments during the life of his Chapter 13 Bankruptcy plan, he will be able to reinstate his original mortgage contract with the lender. This option is not available for debtors who file under Chapter 7 Bankruptcy. An experienced bankruptcy attorney will be able to determine if and under what parameters a debtor qualifies for either plan.
In addition, debtors who are facing more than one mortgage on their home and are in peril of foreclosure because they no longer can make payment on all their outstanding liens, may elect to file a Chapter 13 Bankruptcy, if their home's value is less than or equal to what they currently owe on their first mortgage. Many attorneys are using Chapter 13 Bankruptcy as a vehicle for their clients to strip off these additional mortgages into unsecured debts, which need not be completely repaid.
The strip off procedure will also lower the amount a debtor makes on his monthly mortgage payments. Moreover, current legislation adopted by the United States House of Representatives and presently pending before the United States Senate may vest the Bankruptcy Judges with a discretionary power to alter the terms contained in the promissory note securing the primary deed of trust on a debtor's real property. This means that upon the request by a debtor's attorney, the Bankruptcy Judge presiding over a Chapter 13 Bankruptcy case may order the principal balance on the primary loan reduced, making the debtor's monthly payments on the mortgage more affordable.
Chapter 13 Bankruptcy will also allow a debtor facing repossession of his car to reduce his monthly payments on the vehicle if the car's current market value is less than what the debtor owes on it. A debtor may take benefit of the Chapter 13 Bankruptcy's "cramdown" alternative by repaying the creditor the car's replacement value in equal payments over the life of the Chapter 13 Bankruptcy plan. This option will be available to most debtors who purchased their vehicles more than thirty months prior to filing for Bankruptcy.
There are other benefits a debtor derives from filing for a Chapter 13 Bankruptcy. For example, if a person has a co-debtor such as a co-signer who owes money with the debtor, a Chapter 13 Bankruptcy will protect the rights of such a co-debtor as long as the case is pending. If a debtor files under Chapter 7 Bankruptcy, even though his debts might be discharged, his co-debtor will still be liable on the debt with all the flowing consequences, and the co-debtor therefore may need their own attorney. In addition, debts such as tax obligations, student loans, and back child and spousal support are considered non-dischargeable debts for the most part, and are not eliminated in either Chapter 7 or Chapter 13 Bankruptcy. However, such debts can be paid off over time in a Chapter 13 Bankruptcy plan.
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