Redwood City Bankruptcy: Chapter 13 Bankruptcy (the wage-earner’s plan)
Chapter 13 is also called a “wage earner’s plan”, referring to Title 11 of the United States Code, Chapter 13 therein. This section of law details the debt relief available to people (Chapter 13 is not for businesses) and spells out what must be done to obtain that debt relief.
Chapter 13 puts a debtor on a payment plan for about three to five years. The planned payments are determined by using a debtor’s income as the starting to subtract various permissive deductions which include mortgage payments, utilities, car costs, insurance, child care, etc. The remainder is called “disposable income” used to pay unsecured creditors – because secured creditors get paid first and in full. Most often, the unsecured creditors get only a small portion of what is owed. By law, they get more than a Chapter 7 liquidation would provide, but since that amount is insignificant, the creditors do better when debtors file Chapter 13.
Exemptions still apply but, unlike liquidation, amounts above the exemption limits are required to be paid to the creditors. A discharge can be granted at the end of the plan if payments have been made timely and domestic obligations are fulfilled.
Two other great benefits of the Chapter 13 relate to home ownership. Firstly, arrearage payments may be included in the plan, preventing the lender from foreclosing. The court simply compels the lender to accept the terms. Secondly, if a junior lien is wholly unsecured, a motion can be brought before the judge who deems the junior lien an unsecured debt. It then gets treated just like a credit card debt or hospital bill. This process is called lien stripping and can save debtors lots of money.
Car debt may also be restructured through a “cram down,” a process similar to a lien strip. In some circumstances, if the car loan has existed for a long period of time, debtors can request the court to deem the amount owed on the vehicle above what the vehicle worth as an unsecured debt. The debt is then treated akin to credit card debt and is subject to discharge at the conclusion of the plan.
Chapter 13 is a voluntary filing available to anyone anytime if unsecured debts are less than about $330,000 and secured debts are less than about $1 million. Additionally, a person may not have more than one Chapter 13 case open at a time. Finally, a discharge under Chapter 13 is not possible if you received a discharge through a Chapter 7 in the last four years.