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(2) Doing
things that cannot be accomplished by filing
under Chapter 7: link to top
This section
would be better named: "Reasons to file
Chapter 13 instead of Chapter 7."
Why....you might ask...would anyone in his
or her right mind file a bankruptcy under
Chapter 13 which requires you to pay back a
part of the debt, when you can file Chapter
7 and get released from all of it? That's a
good question and here are 9 good answers:
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1.
You can use Chapter 13 to "catch-up"
on a car, truck or house loan:
You can't do this in Chapter 7. In
Chapter 13, the amount needed to
catch up on these types of loans is
factored into your Chapter 13 plan,
to be paid out to the creditor over
a series of months or years, either
36 months or 60 months dependant
upon your gross income. For
example....in the Eastern District
of Massachusetts....this type of
arrearage is generally set up to be
paid back over the entire duration
of the Chapter 13 plan. Chapter 13
plans are for 3 years/36 months or 5
years / 60 months....and as you can
see....this gives you plenty of time
to bring these debts current.
So....when you can't catch up on
these debts before filing
bankruptcy....but you want to keep
these kinds of property....Chapter
13 is the only way to go.
2.
You can file bankruptcy and still
keep property, even if you don't
have enough "exemptions" to cover
it: Remember
our discussion of "exemptions" back
in Chapter 7. The same exemptions
apply in Chapter 13. The problem
comes when you have more property
than you can protect with available
exemptions. So what do you do?
Chapter 13 may be the answer. Under
Chapter 13 of the Bankruptcy Code,
you can factor into your Chapter 13
plan payment enough money to pay
over to the creditors this extra
equity, which....in the trade....we
call the "equity above exemptions"
or "EAE", and you can do so over the
entire length of your Chapter 13
plan. This lets you file bankruptcy
and still keep this valuable
property.
3.
Chapter 13 stops foreclosures and
repossessions:
As I mentioned, you can catch up
car, truck, and house payments using
Chapter 13. However, this wouldn't
be of any help if....in the
meantime....the affected secured
creditor was allowed to continue on
with efforts to foreclose on your
house or repossess you car or truck.
As long as you make your required
Chapter 13 plan payments, these
creditors are stopped cold and kept
under control for the entire time
you are in Chapter 13 and they can
not foreclose your house or reposes
your car, truck, boat, camper, etc.
Secured debts are those debts where
you have pledged as collateral
things that you own, such as a car,
truck, furniture, business
equipment, or house. When you
finance a car , truck or furniture,
you typically make a number of
monthly payments to repay the loan.
In most cases, the value of the item
you are financing decreases faster
than the loan is being repaid. Most
of the time, especially during the
earlier years of your loan, the
value of the collateral you pledged
will be less than the payoff balance
of the loan. This is known as being
"upside down" on your loan.
4.
You can "strip off" a totally
unsecured mortgage:
If you meet the right requirements,
this can save a boatload of money,
and allow you to get out from under
some really "upside down"
situations, while still keeping the
property involved. For instance,
let's say you owe $270,000 on your
first mortgage and $75,000 on your
second mortgage and your house is
only worth $250,000. Under Chapter
13, you are allowed to get away with
only paying the first mortgage and
stripping away the $75,000 second
mortgage completely. ....thereby
lien stripping on the creditor. In
our example, the $75,000 second
mortgage debt is treated as an
"unsecured" debt to be paid at
pennies-on-the-dollar just like a
credit card. You can't do that
outside of bankruptcy or in Chapter
7. However, in Chapter 13, you can
file papers to "strip off" the
second mortgage. There is a
requirement that there is not a
single dollar of house value to
"secure" it and that you stay in
your Chapter 13 case to completion.
The benefit of this "stripping" is
obvious. In our example...it not
only gets rid of the mortgage
debt....but equally important...it
takes away the need to make monthly
payments on this second mortgage in
the future.
5.
Sometimes, you just have too much
income to file Chapter 7:
First...you might
ask...why in the world would someone
with lots of income be filing
bankruptcy. The answer is that
sometimes people mismanage the
income they have.
Sometimes...emergencies suck away
too much income. Sometimes...the
extra income is only newly
acquired...as where you were out of
work for a period of time. Those
people who are able to hold off the
creditors long enough to earn enough
income to satisfy all the creditors
usually don't file bankruptcy. For
the rest...filing bankruptcy may be
the only solution. The problem is
that you are not eligible to file
bankruptcy under Chapter 7 if you
have too much income. Whether or not
you have too much income to file
Chapter 7 varies from state to
state, depending upon the means
test. An experienced bankruptcy
attorney knows what will and will
NOT be allowed in their local
Bankruptcy Court. Generally, "too
much income" means that you have
more monthly "after-tax" income than
you have "reasonable or necessary"
monthly expenses. Determining what
are "reasonable or necessary"
expenses is where an experienced
bankruptcy attorney can help you.
Assuming this to be the case....in
accordance with the U.S. Bankruptcy
Code, section 11 U.S.C.
707(b)....you are not allowed to
file a Chapter 7 case because it
would be considered a "substantial
abuse" of the Bankruptcy Code. So
what do you do? You have 2 choices:
Either you do NOT file bankruptcy or
you file under Chapter 13. Under
Chapter 13, the extra income (in the
trade...this is called "disposable
income") is factored into your
Chapter 13 plan...for either 3 years
or 5 years depending on your income
level. If you need to file
bankruptcy...and have extra
income....Chapter 13 gives you a way
to do so.
6.
Sometimes, you just have too much
income to file Chapter 7:
First...you might ask...why in the
world would someone with lots of
income be filing bankruptcy. The
answer is that sometimes people
mismanage the income they have.
Sometimes...emergencies suck away
too much income. Sometimes...the
extra income is only newly
acquired...as where you were out of
work for a period of time. Those
people who are able to hold off the
creditors long enough to earn enough
income to satisfy all the creditors
usually don't file bankruptcy. For
the rest...filing bankruptcy may be
the only solution. The problem is
that you are not eligible to file
bankruptcy under Chapter 7 if you
have too much income. Whether or not
you have too much income to file
Chapter 7 varies from Bankruptcy
Court to Bankruptcy Court, depending
upon the interpretation of different
Bankruptcy Court Judges. There is no
clear "cut and dried" rule to
determine this, but experienced
bankruptcy attorneys know what will
and will NOT fly with their local
Bankruptcy Court Judge. Generally,
"too much income" means that you
have more monthly "after-tax" income
than you have "reasonable or
necessary" monthly expenses.
Determining what are "reasonable or
necessary" expenses is where the
Judge comes in. Assuming this to be
the case....in accordance with the
U.S. Bankruptcy Code, section 11
U.S.C. 707(b)....you are not allowed
to file a Chapter 7 case because it
would be considered a "substantial
abuse" of the Bankruptcy Code. So
what do you do? You have 2 choices:
Either you do NOT file bankruptcy or
you file under Chapter 13. Under
Chapter 13, the extra income (in the
trade...this is called "disposable
income") is factored into your
Chapter 13 plan...at least for the
first 3 years of your Chapter 13
plan. If you need to file
bankruptcy...and have extra
income....Chapter 13 gives you a way
to do so.
7. You can
"strip off" a totally unsecured
mortgage: You can't do
this in Chapter 7, but generally,
this is allowed in Chapter 13. This
can be a huge benefit. Let's
say....for example....that your
house is worth $100,000, and that
the payoff on your first mortgage is
$105,000. And, let's say you have a
second mortgage on your house for
$20,000. In Chapter 13, you can file
papers to "strip off" the second
mortgage. The only requirement is
that there is not a single dollar of
house value to "secure" it and that
you stay in your Chapter 13 case to
completion. The benefit of this
"stripping" is obvious. In our
example...it not only gets rid of
the mortgage debt....but equally
important...it takes away the need
to make monthly payments on this
mortgage.
8. The "Cram Down" Benefit of a
Chapter 13 Bankruptcy:
A
major benefit of Chapter 13
bankruptcy is that it allows you to
lower the amount that you owe on
many "secured" debts. The ability to
lower the amount is called "cram
down". This wonderful benefit is NOT
available in Chapter 7, and it can
save you a ton of money. It works
like this:
Secured debts are those debts where
you have pledged as collateral
things that you own, such as a car,
truck, furniture, business
equipment, or house. When you
finance a car , truck or furniture,
you typically make a number of
monthly payments to repay the loan.
In most cases, the value of the item
you are financing decreases faster
than the loan is being repaid. Most
of the time, especially during the
earlier years of your loan, the
value of the collateral you pledged
will be less than the payoff balance
of the loan. This is known as being
"upside down" on your loan.
The "cram down" provisions in
Chapter 13 of the Bankruptcy Code
allow you to pay off these types of
debts for less than what you owe,
but only in certain situations.
Instead of paying what you owe, you
are allowed to pay only the value of
the items serving as collateral.
If you meet the right requirements,
this can save a boatload of money,
and allow you to get out from under
some really "upside down"
situations, while still keeping the
property involved. For instance,
let's say you owe $250,000 on your
first mortgage and $75,000 on your
second mortgage and your house is
only worth $235,000. Under Chapter
13, you are allowed to get away with
only paying the first mortgage and
stripping away the $75,000 second
mortgage completely. ....thereby
"cramming down" on the creditor. In
our example, the $75,000 second
mortgage debt is treated as an
"unsecured" debt to be paid at
pennies-on-the-dollar. You can't do
that outside of bankruptcy.
Can I "cram down" on my house
mortgage? In most cases, the
answer is "Yes", but only if the
fair market value of your property
is less than what you owe on your
first mortgage. If your property
value is greater than what you owe
on your first mortgage, then you
cannot "cram down" or strip away the
second mortgage. Due to the ever
declining property values in
Massachusetts, this option is
becoming more possible every day. |
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(3) Gets rid
of "debt" stress and worry.
link to top
Getting rid of
certain types of unsecured debts is important,
but it's mostly important because it helps you
achieve an even more important goal. It gets rid
of some...and hopefully all...of the stress and
worry that comes with having to deal....day in,
day out.... with crippling amounts of debt, not
to mention that most clients save hundred of
dollars per month in total monthly payments.
I have found that....until people find out how
bankruptcy really works...people believe there
is nothing they can do to get rid of debt...that
they will be in debt for the rest of their
lives...that there is no hope....that with so
much debt, their families will have to go
without...that with so much debt, they will
never get ahead.....and that they will never be
able to buy anything again.
What a relief
they feel when they come into our office and
find out how bankruptcy really works. I cannot
describe what a surprise this is for many
people. For many...it seems like a dream come
true. And...it is....a dream come true, thanks
to the wisdom of your United States
Congress...which created the Bankruptcy Laws
right after we won our independence from
England. Further, bankruptcy even existed and is
mentioned in the Bible.
I have found
that people generally don't file bankruptcy to
get rid of debt. They file bankruptcy to get rid
of the stress...the stress of dealing with
debt...that hopeless feeling of dealing with
something that has gotten out of
control....something that has taken over their
lives and all their waking moments.
The look on
many people's faces when they find out how much
debt and stress they can get rid by filing
bankruptcy is almost comical. People deep in
debt are so used to feeling stressed out...so
used to worrying and feeling helpless....that
they don't know how to act when they find
out...for the first time.... how much debt
bankruptcy can actually get rid of. When we tell
them how much debt they can get rid of
....permanently....and how easy it is to file
bankruptcy....it's like there is a heavy anvil
being lifted from their chests. It doesn't seem
normal to them. We have to keep saying words to
the effect that "It's true. Believe it or
not....it's true. Bankruptcy really does this."
For a while, they just go on saying things like
"But I thought" this...or "But I thought" that,
and we have to keep reassuring them that what we
are telling them is true.
Giving people
news that brings this kind of relief...to people
who have been struggling with overwhelming debt
for months and years....is what its all about
for lawyers....like me. When people walk out of
my office after their first meeting they always
feel like a million pounds have been lifted off
their shoulders, are smiling and know for
certain bankruptcy does and will work for them
and lets them start their financial lives over
again. This time with more knowledge about
financial and credit management.
This benefit of
filing bankruptcy is much the same in Chapter
13.... as in Chapter 7
(4) Keep and
protect property you want to keep. link to top
For whatever
reason, people think that if they file
bankruptcy, they will lose everything that they
have. Nothing could be further from the truth.
Most of our clients keep everything they
own...and lost nothing. Why? Because there are
these things called "exemptions". We talked
about them in the section entitled: "Learn About
Chapter 7.". The same exemptions apply to help
protect property in cases filed under Chapter
13. In the occasional case where it looks like a
client has too much "stuff" to cover with
exemptions...that is where Chapter 13 comes to
the rescue. In Chapter 13, people can keep all
their stuff; they just have to pay in a little
more money....as mentioned above.
Using
Massachusetts as an example....there are
exemptions to cover lots of things including
houses, mobile homes, land, cars, trucks,
household goods and furniture, wages, life
insurance cash value, personal injury and
worker's compensation claims, tools of trade,
retirement plans, IRA's, 401k and 403b accounts,
and the list goes on.
Just like with
Chapter 7....a big part of the process of
analyzing a potential client's case...is making
a determination as to what the client's property
is worth, so that we can figure out whether
there are sufficient available exemptions to
protect all the property. That is, we have to
put a value on each piece of property. This is a
fairly complicated....but extremely
important.... part of the process. The problem
is....there are values and then there are
values. For purposes of applying
"exemptions"....it is important to determine
what we call the "liquidation" value as opposed
to the listing value, the value to the client,
what the client paid for the property, what the
client would like the property to be worth,
etc., etc. For purposes of applying the "cram
down" provisions...on the other hand...we have
to determine "replacement" value.
Filing
bankruptcy does NOT mean you get to keep the
property for free. If there is a lien against
the property.....as in the example above with
the house....the creditor holding the lien still
needs to be paid. In our house example above,
equity is no problem, but the client....if he or
she wants to keep the house....would still have
to keep current on the $105,000 mortgage.
(5) Get out
from under debt on property you are willing to
say "goodbye" to. link to top
Just like in
Chapter 7 ....Chapter 13 can help a client get
out from under the certain property and the debt
associated with it. For instance, say you own a
mobile home that is worth $15,000, but you owe
$25,000 on it. You have tried unsuccessfully to
sell it, but the people who want to buy it
cannot get approved for the financing to
complete the sale. And say you have had to move
elsewhere. Unless you can figure out a way to
get rid of the mobile home and the debt owed on
it, you are stuck. Just like with Chapter
7....Chapter 13 can provide a solution.
What happens is
this. As part of the bankruptcy, you "surrender"
(give back) the mobile home to the person or
company that holds the lien against the mobile
home...in our example the person or company that
is owed $25,000. Once you do this, they have a
right to sell it. Outside of bankruptcy, once
they sold it...they would come back at you to
collect any money they did not get from the
sale. In our example...if they sold it for
$15,000, you would still owe them for the
residual $10,000. But not in bankruptcy. In
Chapter 13...under the law....after you
surrender property back to a lender....all
that's left is an "unsecured" claim against
you....and....as you now know....all that
generally has to be paid on unsecured claims is
pennies-on-the-dollar, and NO interest. Problem
solved. Thank you...Chapter 13
The same result
can also generally be achieved with respect to
other types of property you want to get rid of.
Disclaimer:
Results will vary somewhat, depending on the
jurisdiction where you live and on your
particular assets, debts, income and expenses.
(6) Stopping
Lawsuits and Creditor Harassment.
link to top
Just like with
Chapter 7....one of the most powerful things
about Chapter 13 is the "automatic stay". To
recap what you read in "Learn About Chapter
7"....the words "automatic stay" don't sound
very powerful, but...believe me....this thing
called the automatic stay is very powerful. What
happens is this.
Immediately, when a client files
bankruptcy....the client gets bankruptcy
protection. The Court immediately issues an
order to all creditors demanding that the
creditors leave the client alone. This order is
what is called the "automatic stay." If a
creditor does NOT comply with this order....the
Bankruptcy Court has the power to punish the
offending creditor severely. Most creditors know
this and take steps to quickly comply with the
order. Included in the duties imposed on the
creditor is the duty.... to stop all collection
calls.... at home and work....to stop writing
collection letters.... to stop all lawsuits.....
and to take whatever steps are necessary to
"call off the dogs", as in the case of "repo"
men and foreclosing attorneys.....and to stop
all garnishments for at least taxes and student
loans. Thereafter...and for the duration of the
Chapter 13 case.....if the creditor feels it has
the right to do something, the creditor must
make a formal application to the Court. Since
Chapter 13 cases are generally 3 or 5 years
long....this is powerful medicine for keeping
otherwise aggressive creditors at bay. By having
to make a formal application to the Court before
the creditor can contact you directly, the Court
is in the position to make sure you get the
protection you need and deserve and force the
creditor to only speak with your attorney.
At the end of
your Chapter 13 case, the automatic stay
expires.....but in most cases....it doesn't
matter. Why? Because....with respect to your
mortgage, car or truck loan, you are completely
caught up….. all the unsecured debts that get
"discharged" (which means "gotten rid of"), it
is immediately replaced with a "permanent" order
to protect you. This order is called the
"permanent injunction". In addition, many of
your secured debts will have been paid off
during your Chapter 13, so that you no longer
need the protection of the automatic stay.
At the end of
your Chapter 13 case, creditors with
"non-dischargeable" debts, like alimony, child
support, and student loans can take up where
they left off. The good news is
that....hopefully....if you got rid of enough
other debts in your bankruptcy case.....you will
now have more income and you will be in a better
position.... and a better frame of mind..... to
deal with these residual "non-dischargeable"
debts.
(7) Free up
income for your family. link to top
The whole idea
of getting rid of some debts....and paying less
on others...is so that you don't have to pay out
as much of your income on those debts. This
relieves stress and lots of it.....but to recap
what we said about Chapter 7.....it also does
something else. Most of our clients...by filing
bankruptcy... lower their total monthly expenses
by hundreds of dollars per month. This is huge
because it frees up substantial amounts of your
income to take care of other more important
things....like your normal monthly living
expenses. And, this means
that....hopefully....as long as you hold onto
your job.....you are in a better position to
take care of your family. And, being in a better
position to take care of your family can get
your life started again.
Not filing
bankruptcy can mean you get "stuck in neutral"
or worse, "stuck in reverse". Filing
bankruptcy....be it Chapter 7 or Chapter
13....and getting rid of some of the burden of
debt....generally means you and your family can
start moving forward again. No stress and a
chance to move forward. A second chance at a
fresh start.....It doesn't get any better than
that.
(8) Puts you
in position to earn more money and save.
link to top
For most people
with mounting bills, it usually ends up being a
situation where you have to "Borrow from Peter
to Pay Paul" just to stay current. For most
people....not filing bankruptcy means that the
more you earn, the closer you get to breaking
even each month. But forget about "saving for a
rainy day". The worst comes when you don't earn
enough and you can't borrow any more money from
"Peter" to pay "Paul". Then....you're in big
trouble.
Filing
bankruptcy solves a lot of these problems. The
idea is this. Hopefully...by filing
bankruptcy...you can get rid of enough debt so
that you can live on what you earn. This is the
first step. The second step is to finish your
Chapter 13 plan. The third step is to earn more
money....but without having to use all of it
just to stay current. If you get rid of enough
debt in bankruptcy to really make a
difference....then, and thereafter....if you are
careful....you should be able to start saving
money...especially as you get wage increases or
promotions in your job. Wouldn't that be nice?
(9) Get
started re-building your credit:
link to top
Filing
bankruptcy is the first step. In Chapter
13....filing bankruptcy gets rid of certain
debts...and lowers payments on others. The
second step is to bring your Chapter 13 plan to
a successful conclusion. This can take a
while...but in the meantime....as long as you
make your Chapter 13 payments....at least your
creditors are kept under control. The third
step...is to start saving some money. Many
clients get so much relief from filing Chapter
13 that they are actually able to start saving
money while they are still in Chapter 13. These
are 3 important steps that need to be taken in
order to re-build your credit.
Without a
doubt....if you have gotten to the point where
you need to file bankruptcy, your credit is
already messed up, maxed out and likely dead.
That being the case....the first step in
rebuilding credit is to get rid of some debt. To
do this....nothing....absolutely nothing.....
works better or faster than bankruptcy. A
Chapter 7 bankruptcy is the fastest way....but
the second fastest way to get out of debt is
Chapter 13. Think about it. Anything is
better than trying to pay off debts you can't
afford. At the end of your successful
Chapter 13 case....all of a sudden, you have
less debt. Assuming everything else in your life
holds together....you keep your job....you don't
get divorced.....there aren't a lot of
emergencies....and you get the normal raises and
promotions you deserve, then....for the first
time in a long time....you can start saving some
money. Saving money gives you the necessary down
payment for buying new things...and on and on
you go in the process of rebuilding your credit.
In
addition...by getting rid of some debt ....your
debt to income ratio starts looking better. Over
time....you have money in the bank from saving
money on income no longer ravaged by bills. And
then....naturally and gradually....you start to
attract the attention of more and more willing
lenders. And why not? You are now in the
position to handle more credit. At this
point....life is starting to look good again and
you are well on your way to rebuilding good
credit....in no small part because you made a
smart decision to file bankruptcy.
(10)
Important Disclaimer. link to top
The bankruptcy
laws are extensive and complicated. As a
consequence, most good bankruptcy attorneys do
nothing but bankruptcy. It is a full-time job to
keep up on the bankruptcy laws, exemptions laws,
and procedures....while at the same time serving
all the other needs of our clients. I mention
this because....although all of the information
mentioned before is true, in many....if not
most.... circumstances....(1) Results will vary
depending on your goals, assets, debts, income
and expenses, and (2) Because it was necessary
to oversimplify the information and the
conclusions in order to make important points.
The simple truth is that you cannot become an
experienced bankruptcy attorney or learn enough
to become knowledgeable enough to file your own
bankruptcy case by simply reading the material
on this or any other website. Anyone that would
have you believe otherwise is simply lying to
you for their personal gain....or fooling
themselves. The information on this website is
simply meant to introduce you to important
concepts about bankruptcy and to let you know
the truth: That bankruptcy does NOT work the way
you think or the way you have always been told.
The best advice I can give you is to set up a
consultation with the most experienced
bankruptcy attorney you can find. Most of the
time...except...perhaps.... for people who own
and run large...or fairly
large....businesses...you can do so for FREE. My
office...for instance....offers a totally FREE
initial consultation..... so you can learn about
all your rights and all your
options....bankruptcy and otherwise...and so
that you can get fast answers to all your
questions about debt and how to deal with it.
-------------------------------------------------------------------
(1) What
does it cost to file under Chapter 13?
link to top
We can't speak
for all attorneys...but generally, subject to
certain exceptions....in our office...for
purposes of filing cases in the Eastern District
of Massachusetts....the "up-front" cost for
filing Chapter 13 is $2,500 - $3,500 (based on
complexity)...plus the cost of the filing fee,
credit reports and possibly the judgment search
fee. The filing fee for Chapter 13 is $274.
Credit reports and judgment searches cost $25 a
piece or you can get a credit report for free
from calling Experian at 888-322-5583.
The overall
cost of representation in a Chapter 13 case
varies from State to State. In
Massachusetts....the cost for the garden-variety
Chapter 13 case is set by the attorney and can
not exceed $3500 with out court approval.
(2) How fast can I get relief?
link to top
The answer is
the same as for Chapter 7. We can't speak for
other attorneys....but our answer is this. In
most cases...we work as fast you pay us and
provide us with the documents and other
information necessary to draft the schedules
required to file your case. If need be...your
case can be filed in as little as a week. In an
emergency...if need be....to avoid repossession
or to stop a foreclosure....we can free up staff
to get a case filed in less than a day.
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