How Chapter 13 Works

Chapter 13, Bankruptcy, ForeclosureChapter 13 is one of several different bankruptcy options for people who find themselves having a hard time keeping up with all of their monthly bills. Clients who choose chapter 13 as the way to address their money problems are usually behind on house payments, car payments, or both and would like to try and keep their house or car.

Chapter 13 allows a client to propose a plan as to how they will catch up on house payments and car payments. Clients can offer to catch up their debts over a period of three to five years depending on their income.

Chapter 13 also allows a client to consolidate unsecured debt (debt like credit cards, pay day loans, and medical bills), stop interest on those debts, and sometimes pay less than the full amount of those debts during their plan. There are several factors that determine how much a client will have to pay unsecured creditors but they are often allowed to pay back a very small portion of that debt. A client does not have to pay back unsecured debt that is not paid during the plan (there are a few exceptions for debts like student loans and child support payements).

Let’s look at an example of how chapter 13 helps:

Sam and Brenda are married with two small children. They have lived in their house for 11 years. Sam works for a refinery company and Brenda is a stay at home mom. Sam became sick and was unable to work for several months. During this time, Sam’s medical bills began to pile up and they were unable to pay on their credit cards. They couldn’t make their house payments and have missed three car payments.

After several months of missing house payments, Sam and Brenda receive a foreclosure notice. While Sam has already gone back to work and is earning enough to make his house payments, his mortgage company will only allow him to keep his house if he can pay $6,000 which is the total amount his is currently behind on the mortgage. Sam and Brenda decide to file for chapter 13.

By filing a chapter 13 bankruptcy, Sam and Brenda are protected from collection efforts by their creditors. This means that their mortgage company cannot foreclose on their house. As part of their chapter 13 plan, Sam and Brenda will begin making their regular house payment immediately. They will also pay their mortgage company an additional $100 per month which will allow them to catch up on the payments they missed while Sam was sick. Outside of bankruptcy they would have been forced to pay $6,000 all at once to keep their house. Chapter 13 allows them to catch up over time. They will also pay off their car over the five year plan. Sam and Brenda owe $40,000 in medical bills and credit cards. They will only be paying back 25% of this part of their debt which comes out to $160 per month. This is a lot less than the $700 per month they had been paying on credit card bills before Sam got sick. They will not have to pay the remaining $30,000 of their unpaid medical bills and credit card debt once their plan is complete. After their five year plan, they will be current on their house payments, their car will be paid off, and they will have no unsecured debt.

We understand that filing for bankruptcy is never an easy decision. We also know that holding on to the things you’ve worked hard to acquire is important. Give us a call if you’d like more information about whether chapter 13 might be an option for you. Consultations are always free and we want to help.