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As it was often used to stop, last minute, foreclosures, the Chapter 13 (“13”) bankruptcy, was popular in Las Vegas, during the height of the recession. During those chaotic time, many debtors who filed a 13 had no intention of finishing their bankruptcy. The 13 (“13”) though as it requires monthly payments for three to five years, is is still only filed as a last resort. However, the 13 does have several advantages, which will be explained later, over the Chapter 7 bankruptcy. (“7”) Under most circumstances though the only reason to file a 13 over 7 is for the following:
- Means Test– You make too much money to pass the means test. So, if you want debt relief, you are forced to file the 13.
- Overdue Mortgage Payments: Only with the 13, where you pay off past due mortgage payments, are you able to save your house from foreclosure.
- Filed a 7 Within Eight Years-You can only file the seven once every eight years. So, a 13 could be your only option. However, if available, you may eventually be able to convert your 13 to a 7.
Automatic Stay-Like the 7 the 13 also has an automatic stay. (“Stay) The stay starts once the bankruptcy is filed and stops most collections, repossessions, and lawsuits against the debtor. This means that, during the automatic stay, creditors must stop all lawsuits, collection calls, and wage garnishments. The automatic stay also, at least temporarily, stops foreclosure.
Under a 13 plan, you propose to the trustee a dollar amount that you will pay the trustee for three to five years. Once the plan is approved the trustee will then use your payments to compensate creditors who file a proof of claim.
Proof Of Claim Not all creditors are equal in a 13. Therefore, merely filing a proof of claim does not guarantee that you will get any money from the trustee. The Bankruptcy laws allow for certain Creditors to be given priority over other creditors when it comes to who is paid first. The following a rough guide on the priority order of who gets paid first under a 13 bankruptcy plan.
- Trustee and Debtors Attorney: The trustee receives 10% of your total plan payment. Also, in most cases, the majority of your fees are paid via the plan; which, is good as it allows debtors with minimal money to be able to afford bankruptcy.
- Secured Transactions/Creditors: Obligations that are secured by the property are secured transactions. With a secured transaction if you don’t pay a debt, the Creditor can take the asset or property. Examples of this are your mortgage or a car secured by an auto loan.
- Priority Debts- This includes, but is not limited to, federal and state taxes, and back child support. ( I don’t think many would be surprised about the IRS getting priority. )
- Unsecured Creditors: Credit cards, are the most common example of an unsecured creditor. Credit cards are in most situations not secured by anything. For example, if you buy gas with your credit card and later file for bankruptcy the Creditor cannot repossess the gas that you purchased.
Please Note: The priority order in Chapter 13 means that an unsecured creditor may not get any money from the trustee if there is not any money left after the Trustee, Debtor’s attorney, IRS, and secured creditors get fully paid.
Under most circumstances, after the three to five years of making payments, most of your outstanding debts will be discharged or eliminated. Many debtors think that a 13 would not work for them because if they can’t pay their bills now, how would they be able to pay an extra monthly payment for three to five years? However, if you have a steady income, and you do not have to get caught up on mortgage payments, most debtors will be able to file a 13. A 13 plan payments are based upon your income minus all of your justifiable expenses. Justifiable expenses are established upon what the IRS thinks is reasonable for a family to spend on life’s necessities. For example, with the 13, you would not be able to justify buying caviar and lobster every night for dinner; but, you also would not be required to eat dog food either. During the three to five years of plan payments, you can pay from 10% or less of your outstanding debts to 100% of all of your debts. If you can pay 100% of your debts back in the plan, you will not be put on a strict budget. However, if you pay less than 100% of your debt back under the plan you’ll be put under a tight budget and, other than necessary living expenses, you will have to justify all of your expenses. The common reason a 13 may not be viable for debtors is that they are too far behind on their mortgage payments. Under a 13 you place your past due mortgage payments in the plan. Those past due mortgage payments (divided by 36 to 60 months), along with your current mortgage payments have to be fully paid off within the three to five years of the plan. For example, you have a $2,000 mortgage, and you are $24,000 in arrears, you’ll have to $2,667 to $2,402 in monthly payments in your plan. Therefore, if you can’t afford the past due plan payments plus your current mortgage payments, the 13 is not viable. Additionally, a 13 cannot be filed if you have too much debt. As of April 1, 2016 the maximum debt that you could have would be $1,184,200 for secured debts (debts where a creditor can take property if you do not make the contracted payments. I.E., mortgage.) and $394,725 for unsecured debts. (Debts where the product purchased with the credit cannot be repossessed. I.E., most credit cards) Granted, these limits seem high. However, if you have extensive medical bills, the $394,725, unsecured debt limitation, can be easily surpassed. Another reason a 13 may not be an option is that if you own too much non-exempt property. Exemptions are different in a 13 because under a 13 you are not required to sell your property for the benefit of the trustee. However, if a property is not exempt, you’ll have to pay for the value of the non-exempt property in your bankruptcy plan. For example, rental properties are not exempt under Nevada’s bankruptcy exemptions. So, under a 13, you would have to pay off the full value of any rental that you own within the three to five years. So, if you can’t pay off the cost of the rental, your Chapter 13 plan will not be approved.
In conclusion, the 13 is only recommended for very few debtors who qualify for the 7. Specifically, if you are eligible for the seven, the only reason you should file the 13 is to save your house from foreclosure. At Martin Law PC, we’re experienced in filing the Chapter 13 for Las Vegas residents. Call now for your free consultation.