Chapter 13 Bankuptcy is the first option that you must look at if you are considering filing for bankruptcy protection. It has always been the intention of the U.S. Bankruptcy laws to have people considering bankruptcy as option to get out of debt to look at how to pay back creditors at least a portion of what is owed. However, as consumer debt has steadily risen over the past 15 years so has the frequency and sheer volume of people filing bankruptcy. Many of these bankruptcy cases were Chapter 7.
Creditors Cried For Help From Congress
With increasing consumer debt comes more and more creditors with their money on the line. With more and more consumers filing for bankruptcy, more and more creditor money - mostly unsecured credit card balances - was being lost. Retail credit companies - credit card companies - lobbied the U.S. Congress very hard for years and finally in 2005, Congress came out with changes to the bankruptcy laws when it passed the Bankruptcy Abuse Prevention and Consumer Protection Act. These changes brought to the forefront the means test to determine whether someone should enter a Chapter 13 instead of a Chapter 7.
What Is Chapter 13 Bankruptcy?
Chapter 13 Bankruptcy is a reorganization of your debt pay back requirements to your creditors. Essentially, if you are going to use a Chapter 13 Wager Earner Plan to get out of debt then you are agreeing to pay a portion of the money that owe to your creditors.
How Does Chapter 13 Work?
Prior to filing for a Chapter 13 Bankruptcy or a Chapter 7, you give your bankruptcy attorney every imaginable bill, living expense from utility bills to dry cleaning bills, house payment information, auto and student loans, and of course your credit card statements. You will also submit your bank checking and savings account statements, any other asset statements that you have, as well as paystubs from your job. Do not try to hide anything. You call tell your attorney and they cannot say anything to anyone about any of it because of their client confidentiality agreement. Let the attorney help you decide whether you need to disclose something on your petition or repayment plan.
Your bankruptcy attorney will then do some calculations and layout a payment plan to repay your creditors some percentage of what you owe them. The bankruptcy then files this plan to the bankruptcy Trustee at the bankruptcy court. Once your payment plan petition has been submitted the Trustee will either approve it, or ask more questions to either approve it at the point when they get the answers to their questions, or deny your payment plan and petition. If the Trustee approves your plan, your payments will begin 30-45 days from the date of the approval.
Who Do I Make Payments To?
Then you make payments to your bankruptcy Trustee and then the Trustee in turn pays money to your creditors based on the schedule that the Trustee put together. At the end of the payment period your debts will be paid leaving you with a fresh start.
Make Your Payments On Time
The first creditors to be paid will those that are considered Secured like your mortgage company if you have one. From there creditors are paid in priority until everyone is paid off according to the repayment plan. Once you complete the plan all of your creditors are paid in full and you are no longer responsible for the remainder of what was owed. Also, none of the creditors can come after you for any of the balances that didn't get paid in full. The bankruptcy completes your debt as long as you complete your payment plan.
Don't stop in the middle of your payment plan. You do want to keep making payments. If you stop the bankruptcy trustee has the ability to get your bankruptcy case dismissed. If you case is dismissed you will find that you can't just file again immediately - you will have to wait for some time to pass before you can file agin. Also, as soon as your case is dismissed due to missed payments your creditors and collectors will be pretty quick to give you a call to pick up hounding you where they left off.
Use Chapter 13 Bankruptcy To Stop a Foreclosure - A Big Advantage over Chapter 7
One of the main advantages of a Chapter 13 bankruptcy is that it can be used to stop a foreclosure dead in its tracks. Immediately upon filing your bankruptcy petition to the court and once your creditors are notified that you have filed for bankruptcy they should stop calling you. This includes your mortgage company collection department. In accordance with U.S. Bankruptcy Law, when someone files for any type of bankruptcy all collection proceedings have to cease.
In some cases secured creditors like mortgage companies and automobile companies can request an exception to continue with their collection processes. The court can grant them this permission. But in a Chapter 13, it is highly unlikely that the bankruptcy court will give them permission to continue pressing you with their collection efforts - and this includes a foreclosure process and an automobile repossession proceeding.
If you are in foreclosure it is probably because you got behind on your mortgage payments and couldn't get caught back up and couldn't work out a repayment plan with your mortgage company on your owe. Chapter 13 forces a repayment plan on your mortgage company. The back payments and interest that you owe on your mortgage are calculated into your Trustee determined repayment plan. Your repayment plan begins with 30-45 days from when your plan is approved by the Trustee. Once you begin making payments to the Trustee your mortgage company, and the rest of your creditors will begin to get paid as well.
Disadvantages Of Filing A Chapter 13 Bankruptcy
One of the major disadvantages of filing a Chapter 13 is that it will take you 3-5 years to payoff your creditors and during the time that you are under the repayment plan you are not allowed to get any other creditor. Nor are you allowed to get a mortgage or refinance your current home unless you get permission from your bankruptcy Trustee ahead of time.
Another disadvantage to filing a bankruptcy of any kind is that it will be a permanent part of your credit report for up to 10 years. This will have ramifications for quite some time in getting credit at all, and if you get credit - how much can you get, what interest rate are you charged etc. Generally, an approval to refinance or purchase a home or get any other form of credit must have a compelling and beneficial reason to get approved. In some cases, you can refinance while in Chapter 13 bankruptcy.
Can I Refinance My Home While in Chapter 13 Bankruptcy?
Yes, with conditions. One condition is that you will probably will only be able to qualify for an FHA loan if you have been in the plan for at least 12 months. You will need to be in it for at least 1 year to get an approval through FHA. Another conditions is that your bankruptcy Trustee must give a letter approving (or showing no opposition) to you to submit with your loan package for underwriting. If you are refinancing your home you will have to get your payment history to the Trustee as well to give to underwriting.
Overall, filing for bankruptcy is going to require you to look real hard at the option of filing a Chapter 13 reorganization plan as your first option. If it is determined that you cannot afford the payment plan then you will then be able to look at the Chapter 7 bankruptcy option. Either way, you can either temporarily or permanently stop the foreclosure process to either give you more time, get things worked out with your mortgage company, or pay off the arrears on your mortgage through the Chapter 13 repayment plan. The whole process is a little complicated so that's why it is a good idea to hire an attorney to represent you.
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