What Is Chapter 13 Bankruptcy?

Chapter 13 Bankruptcy allows you to repay all or part of your debts on terms that are generally much more favorable to you. People who own assets and have a reliable income may greatly benefit from Chapter 13.

A bankruptcy filing under Chapter 13 is only available to individuals or couples. It is often called a “debt reorganization” or “debt adjustment.” A debtor is able to pay back all, or part, of the debts owed, usually over a 3-to-5-year period.
People who find themselves in temporary distress can make use of Chapter 13 to alleviate their financial problems, protecting their real estate and other large assets from foreclosure or other seizure.

The Chapter 13 repayment plan is sometimes referred to as a “wage earner’s plan” because it requires the debtor to have regular income in the future. It must be approved, or “confirmed,” by the court. You must make payments over the scheduled period until the plan is completed. If your plan pays all of your outstanding debts, it is called a “100% plan.”

If you cannot afford a 100% plan, you can pay all of your disposable income over the life of the plan and the outstanding balance will be discharged. Your disposable income is the amount that remains after subtracting your allowable expenses from your monthly gross income.

What Is the Chapter 13 Filing Process?

If you see that your debts are swallowing your income and causing you distress, then it’s time to call on Roemerman Law to help you re-organize your finances and recover your peace of mind.

Here is why you may wish to file under Chapter 13:

  • You want to keep your assets, such as an expensive car, your house, or other valuables such as heirlooms or collections.
  • You want to stop a foreclosure and wish to repay your past due amount (also known as your “arrears,” or the amount “in arrearage”) over the life of the plan, rather than having to write a check for the total amount immediately.
  • You want an “Automatic Stay”: When someone files for bankruptcy, the automatic stay immediately protects their assets. It prevents creditors from touching the debtor’s assets until the court has determined the rights of everyone involved.
  • You may be able to repay your creditors on terms more favorable to you, paying only the value of an asset, rather than the remaining amount on the original loan, making payments over a longer period, or repaying at a lower interest rate.
  • If you pay less than 100% of the debts owed to your creditors, the remaining balance is discharged (meaning you don’t have to pay it, now or in the future).
  • Even if you have a 100% plan, you could be saving money compared to your current situation. For instance, if you have credit card debts with high-interest rates, the interest is frozen for the life of your plan. This means you will be paying down the balance owed instead of making minimum payments that barely cover the interest.

Your Chapter 13 bankruptcy lawyer will sit down with you and help you establish a viable plan that repays your debts while still leaving you enough income to cover your everyday needs.

Credit Counseling Course

Chapter 13 and Foreclosures Once your eligibility for Chapter 13 has been determined, the very first step is to take a credit counseling course. Debtors must take a credit counseling course before filing for bankruptcy and another one before being discharged from bankruptcy. Roemerman Law will make it easy for you to take the courses, as well as handling the filing of your certificates of completion with the court for you.

These courses are usually run by non-profit organizations that want to help people find a steady footing when it comes to managing their finances and avoiding bankruptcy.

New York’s four Federal District Courts have a list of approved organizations that run these programs. At the end of the program, which usually lasts less than a day, you will be issued the required certification. Your certification lasts for 180 days.

Roemerman Law seeks to put its clients in a better place in their lives, not merely “help you file for bankruptcy.” One of the requirements to filing a bankruptcy in New York is that you take both a pre-filing and a post-filing course. We offer these through DebtorCC (Credit Counseling) and can save you money when you work with us.

More importantly, we enroll all our clients in the 720 Credit Score Program at no extra cost, allowing you to build your credit score after bankruptcy. Repeat business is nice in most industries; in bankruptcy, we would rather you file once, get a fresh start, then build your credit and never have to file again.

You File for Chapter 13

Once you have discussed your financial details with your bankruptcy lawyer, they will explain how to file for Chapter 13 and handle the filing process for you. You will be asked to pay a filing fee (which stands at $313 in New York at the time of writing).

Once you file for Chapter 13, an automatic stay is issued. This protects your assets and prevents creditors from seeking payment from you – once you file, those creditors are forced to go through the bankruptcy process and cannot harass you. Unless the court says otherwise, your home, car, and other belongings are safe.

Do I Need a Chapter 13 Bankruptcy Trustee?

A bankruptcy trustee will be assigned to your case when you file for Chapter 13.

The bankruptcy trustee is tasked with overseeing your case, making sure the paperwork is in order and your repayment plan follows current laws and is a good faith, reasonable effort to repay your creditors to the best of your abilities.

Once your plan has been approved, your bankruptcy trustee will take your monthly payments and disburse them to your creditors. Your bankruptcy trustee is the buffer between you and your creditors so that you never have to deal directly with them.

The Court Decides

You will be asked to present to the court the details of your debt, income, and expenses. You will provide a list of your creditors, income sources, daily and monthly expenses, and a plan on how you will pay back your debts in monthly installments. A bankruptcy trustee will be assigned, acting as an intermediary between you and your creditors.

Your repayment plan should be viable and realistic. The court will take into consideration your income and evaluate whether your repayment plan gives you enough financial space to repay your creditors, maintain your current payments (mortgage, car, etc.), and still leave enough for living expenses.

During the confirmation hearing, the court will go through your repayment plan and either confirm or reject it. With the guidance and assistance of an experienced Chapter 13 New York bankruptcy law firm like Roemerman Law, your repayment plan will be solid and the chances of getting the approval of the court much higher than doing it by yourself.

Your creditors have the right to oppose your repayment plan during the confirmation hearing. While they may object to parts or all of your plan, the final say belongs to the court. Your Chapter 13 attorney’s assistance will be crucial here, as they will stand up for you and fight for the confirmation of your plan.

Types of Debt Covered by Chapter 13

Priority debts survive bankruptcy and are still owed, while unsecured, non-priority debts are discharged. Secured debts are either reaffirmed (you keep paying for that car or house) or rejected, in which case the debtor will give back the asset to the creditor, consensually, with no foreclosure, repo, or lawsuit needed. If payments are made, the assets are kept.

In Chapter 13 bankruptcy, you pay your “back taxes” and other such debts, and the discharge comes on everything, at the end. Priority debts get paid first, with secured debts following the same formula where you can choose to keep your assets or not. Unsecured creditors come last, and you may not have to repay your debt in its entirety.

Qualifying for Chapter 13

To be eligible for Chapter 13 bankruptcy in NY, you must be an individual or couple, have a steady income, and have a debt that’s below a certain threshold. Specifically:

  • You must have the income to show that you will be able to pay for your past debts as well as your current payments. Income sources can vary: salary, pension, rents, social security, property sale, or any other income.
  • You must be an individual or couple: Chapter 13 does not apply to businesses or organizations.
  • Your unsecured debts must be less than $394,725. As for your secured debts (e.g. home mortgage), they must be under $1,184,200 (numbers valid through 2022).

Chapter 13 vs. Foreclosure

When a homeowner falls behind in their mortgage payments, they risk foreclosure on their property.

When most people buy a home, they take out a loan. In doing so, they sign a promissory note with the lender, promising to repay the loan – with interest – over a period of time, usually either 15 or 30 years. To entice the lender to give the loan, the purchaser of the home must also sign a mortgage, which allows the lender to seize and sell the house if repayment is not made. If you stop making your mortgage payments, your lender (in most cases, your bank) can “accelerate” the loan, meaning demand the full value be paid immediately, then sell your home at auction to pay the loan. This process is called foreclosure. New York is a judicial foreclosure state, meaning that a lender seeking foreclosure must bring a lawsuit against a homeowner/borrower and that a New York State court will hear the case.

People wishing to keep their homes can often do so by filing for Chapter 13. Payments made under a Chapter 13 plan will include the arrears and help the bankruptcy debtor keep their home. Most homeowners can’t afford to repay the full arrears in a single payment, but many can catch up when paying the arrears over 3 to 5 years in a Chapter 13 plan.

Your bankruptcy lawyer will help you prepare a repayment plan that lets you repay your mortgage arrears.

The courts and the creditors want to make sure that the debt will be repaid, even if it takes longer than expected. Your bankruptcy lawyer will propose your Chapter 13 plan to the court. If the trustee does not object, it will be approved, or “confirmed.” If the trustee does object, your lawyer will have to either amend the plan or argue on your behalf before the court.

Once your plan has been confirmed, the bankruptcy trustee is tasked with directing your mortgage arrears payment to your lender, thus protecting your home from foreclosure and repossession.

Chapter 13 and Second Mortgages

Many people have multiple liens on their properties. During some economic downturns, the value of houses goes down dramatically, leaving many junior mortgages (the subsequent mortgages) unsecured.

During your meetings with Roemerman Law, you should mention the existence of a second or third mortgage on your home. A home appraisal can evaluate the current value of your home, letting us determine whether you can use a process known as lien stripping.

Lien stripping is the process of eliminating junior liens during Chapter 13 bankruptcy. If your mortgage is greater than the fair market value of your home, you may be able to wipe out liens on a parcel of real property that are wholly unsecured. This could give you significant breathing room and help you keep your home while making realistic and affordable payments to your bank.

How Long Does Filing Take?

Filing for Chapter 13 is relatively swift and the court will decide promptly if presented with a reliable and affordable repayment plan. The filing process usually takes up to 3 months until the court confirms your repayment plans.

However, you will be free of your bankruptcy charge only after you’ve made the last payment of your plan. This means after a period of 3 to 5 years, depending on the repayment plan that has been approved.

With your last payment, you will be issued a bankruptcy discharge order that confirms that you have successfully completed your plan and been discharged from bankruptcy, with your case closed.

What’s the Difference between Chapter 7 and Chapter 13 Bankruptcy?

Chapter 7 and Chapter 13 differ in both their scope and final outcome.

When a client comes to Roemerman Law, we evaluate their situation and advise them as to which type of bankruptcy best protects their interests and assets.

The biggest difference between the two is what happens to your property:

  • Chapter 7 Bankruptcy, which is known as liquidation bankruptcy, involves selling some or all of your property to pay off your debts. If you don’t own a home and have a limited income, then this may be the right kind of bankruptcy for you.
  • Chapter 13, also known as reorganization bankruptcy, offers you a chance of keeping your property if you successfully complete a court-mandated repayment plan that lasts between three and five years.

When determining which kind of bankruptcy is right for you, we examine a series of factors, including the following:

Who can file? Individuals and business entities may file for Chapter 7 but only Chapter 13 is only available to individuals (including sole proprietors).

Means test: To file for Chapter 7, you must have low enough disposable income. As for Chapter 13, you may not have more than $419,275 of unsecured debt or $1,257,850 of secured debt (as of 2021).

How long does it take to receive a discharge? With Chapter 7, you typically need three to five months to receive a discharge. With Chapter 13, you only receive a discharge upon completion of all plan payments (usually three to five years).

What happens to your property? With Chapter 7 bankruptcy, the trustee can sell all non-exempt property to pay creditors. With Chapter 13, debtors keep all property but must pay unsecured creditors an amount equal to the value of non-exempt assets.

Lien stripping: Chapter 7 bankruptcy does not allow the removal of unsecured junior liens from your property through lien stripping. Chapter 13, on the other hand, does—as long as certain requirements are satisfied.

Loan cramdown: Chapter 7 does not allow the reduction of the principal loan balance on secured debts through a loan cramdown. Chapter 13, on the other hand, does—as long as certain requirements are satisfied.

Creditworthiness: The line on your credit report stating that you completed a bankruptcy will remain for 10 years with a Chapter 7 bankruptcy and 7 years with a Chapter 13 one. It should be noted that in both cases your credit score can begin to recover immediately, as credit is a function of many different factors.

Benefits: Chapter 7 bankruptcy allows debtors to quickly discharge most debts and get a fresh start. Chapter 13 allows debtors to keep their property and catch up on missed mortgage, car, and nondischargeable priority debt payments.

Drawbacks: The trustee can sell non-exempt property. Also, Chapter 7 does not provide a way to catch up on missed payments to avoid foreclosure or repossession. As for Chapter 13, you must make monthly payments to the trustee for three to five years and may have to pay back a portion of general unsecured debts.

Our legal team here at Roemerman will help you make the most of the bankruptcy tools available to you.

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