Chapter 13

A Chapter 13 is a debt repayment plan for individuals, married couples, and sole proprietor business owners with regular income, whose unsecured debts do not exceed $383,175, and whose secured debts do not exceed $1,149,525. If your debts exceed these amounts a Chapter 11 reorganization may be available, but is much more expensive.

When the case is filed, creditors are immediately prohibited from taking further collection action under a temporary restraining order, the "automatic stay," which remains in effect as long as payments are being made under a confirmed plan. Except for long term debts payable over longer than 5 years, like house loans, all debts are usually paid through the plan. Secured debts, like car loans, can be modified by the plan but must be paid in full up to the value of the collateral securing the debt. To the extent that the debt exceeds the value of the collateral, it is treated as unsecured and can be paid along with other unsecured debt at less than 100 cents on the dollar. Interest is normally paid on secured debts but can be reduced from the contractual rate. Unsecured debts are paid with no further interest accruing after the case is filed. When the plan is completed, any unpaid balances are discharged just like a Chapter 7 so they can never be collected.

Lien Stripping: If the value of real estate does not exceed the balance of the first loan, any junior secured loan is treated as unsecured and can be paid at less than 100 cents on the dollar. At the end of the plan the unpaid balance is discharged and the security interest should be released. It may be necessary to sue the creditor at the end of the plan to force the release of the security interest. This strategy is new with the recent decline of real estate values and there is some uncertainty as to how successful this strategy will be in any given case.

Ability to Pay: Just as the Court calculates eligibility in Chapter 7 through the Means Test, the same calculation is required in Chapter 13 for debtors who have above median income. Unfortunately, due to the nature of the test, it can sometimes show a greater ability to pay than one would expect.

Non-Exempt Property, Preferences and Fraudulent Transfers: (See the discussion under Chapter 7) In Chapter 7, the trustee liquidates non-exempt property, preferences and fraudulent transfers to generate funds to pay creditors. In Chapter 13, the trustee does not liquidate property, but rather collects the plan payments and distributes the funds to creditors under the terms of the plan. The existence of non-exempt property, preferences or fraudulent transfers affects the amount that unsecured creditors receive under the plan; unsecured creditors must receive as much or more in Chapter 13 as they would receive in Chapter 7 from the liquidation of non-exempt property, preferences and fraudulent transfers.

5 Reasons to file a Chapter 13:
1. You are not eligible for Chapter 7 under the Means Test.
2. You have too much non-exempt property that will be liquidated in Chapter 7.
3. You have too much non-dischargeable debt that cannot be controlled in Chapter 7, like taxes and student loans, which can be repaid over time in Chapter 13.
4. Lien stripping.
5. Stopping a foreclosure by paying the delinquent payments through the plan over as many as 5 years.

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