Chapter 13 Bankruptcy – Kansas
Chapter 13, also known as the “wage-earner’s plan”, also “wipes out” the same unsecured debt that Chapter 7 does, and sometimes more. For example, debts you were ordered to pay in a divorce may not be dischargeable in a Chapter 7, but are dischargeable in a Chapter 13. In addition, Chapter 13 allows you to consolidate your secured debt and non-dischargeable debt into one monthly payment at a lower interest rate than you are now paying, and that payment is usually much lower than your payments are now.
A. Advantages of Chapter 13
Chapter 7 is primarily for people who could make the payments on their secured debt (e.g., house and car) and non-dischargeable debts (e.g., taxes, student loans and child support), if the unsecured debt (i.e., credit cards and medical bills) were wiped out. However, for someone who has a lot of secured and/or non-dischargeable debt, Chapter 7 would not help, since they would still have high monthly payments.
In Chapter 13, we add up the total of your secured debt (excluding your house payment and any lease payments or rent-to-own payments, which you would continue to make outside of bankruptcy) and non-dischargeable debt, and arrange a payment plan which can last from 36 – 60 months, depending on how much you owe and how much you can afford to pay per month. You would make these monthly payments, based on your budget, to a Trustee, who would then pay your creditors out of your payments. During the time you are making these payments, the creditors cannot bother or harass you. Once you have completed making all the payments, you would be debt-free (except for your mortgage and unpaid student loan balances, if any).
Also, as noted above, some debts such as taxes are not dischargeable in bankruptcy. For example, if you owed the IRS $10,000, Chapter 7 could not help you, and the IRS would still want their money immediately. However, in Chapter 13, the IRS must get their money from the monthly payments, and would not be able to force you to pay sooner.
Another advantage of Chapter 13 is in the amounts you can pay back. Remember the car example from the previous section? If you have a car worth $3,000, and you owe $5,000 on it, in Chapter 7, you have the following choices:
1. Surrender the car and wipe out the debt;
2. Pay the $3,000 value of the car in cash now, keep the car and wipe out the remaining $2,000 excess debt; or
3. Pay the entire $5,000 in payments as per the original agreement.
In Chapter 13, you pay whichever is less – the amount owed or the value. In the above example, you need only pay the $3,000 actual value of the car, and you would do it through the payment plan. In addition, the interest rate may be reduced to a discounted rate (if it is higher than 10%).
A final advantage of Chapter 13 is the attorney fee provision. In Chapter 7, although the attorney fees are less, because there is less work in drafting a Chapter 7 and because it is usually over with in six months, the attorney fees are due upfront (this is not because we don’t trust you; it is because some judges have recently ruled that any attorney fees in a Chapter 7 which are not paid as of the date of filing are discharged the same as other debts – and we wouldn’t be in business very long if we kept bankrupting our own fees!). In Chapter 13, attorney fees are included in the repayment plan along with the secured debts, and are paid over the life of the plan (the Bankruptcy Code specifically says that the fees may be included in the plan payment, so the judges couldn’t rule that they are dischargeable like they did in Chapter 7). So, if you can’t come up with the attorney fees in advance, you can still file and get immediate protection.
When Chapter 13 is Better
If you fall into one of the following categories, Chapter 13 may be a better choice for you:
1. You have a large amount of secured debt; or
2. You are behind on your payments on the secured debt; or
3. You owe more on your secured property than it is worth (for example, your car is worth $3,000 and you owe $6,000 on it); or
4. You owe non-dischargeable debts such as taxes, student loans or back child support; or
5. You cannot afford the attorney fees upfront, but need immediate relief.
When the attorney meets with you, he will go over your specific situation, and discuss with you which option would work better for you.