When Should You Consider Filing a Chapter 13 Bankruptcy?

Interviewer: At what point do you think that Chapter 13 becomes the most suitable or best option for someone?

You Should Consider a Chapter 13 Bankruptcy If You Are Facing Foreclosure Due to Late Mortgage Payments

Court Koehler: The most common situation is where you have a foreclosure or you’re behind on your mortgage payments and you’re facing a possible foreclosure in the near future. The reason I say that is that when you do a Chapter 13, the advantage is that you don’t have to have any assets liquidated. It’s an attractive option for people who have assets that they want to keep.

Oftentimes, people come to me and they’re in financial trouble and they don’t want to lose their house. Nobody wants to lose their house. It’s a very sentimental item. You spent a lot of time on upkeep and making it your home, where you live and you’ve got your family and your friends living close in the area that you want to be in. You don’t want to have to be uprooted and forced to live in some other place that you don’t like.

A Chapter 13 Bankruptcy Can Also Allow You to Retain a Car

Chapter 13 is the most attractive option for people who are facing a foreclosure problem or behind on their mortgage. It can also help with cars; people that are in financial trouble where they have car loan problems and they don’t want to lose their car. They want to keep their car. They can file a Chapter 13 for that as well.

There are some other advantages to it. In certain circumstances, it can help you strip down the value of a second mortgage. It also helps if you have car payments where the principal is much higher than the amount that the cars are actually worth. You can get the value of those loans down to what the actual value of the car is. That’s a big advantage to Chapter 13 also.

A Chapter 13 Can Be Extended from a 3 Year to a 5 Year Plan

Interviewer: How long could it typically last? Could it be extended with any circumstance?

Court Koehler: The Chapter 13 plan length is a minimum of three years and a maximum of five years. It’s not extended beyond the five-year range, but you can start out with a three-year plan and then have it extended out to the five-year range if you need to. How long the length of your plan is going to be is usually determined by your median income level.

If you are above the median income level for the state then you’re required to do a five-year plan. If you’re under that median income level then you can do a three-year plan but you can take up to five years if you want. In that way, you can pay a lower monthly payment. While you’re not required to do a three-year plan, a lot of people choose to do a five-year plan because it gives them a lower monthly payment.

You Are Required to Have a Regular Annual income in Order to File a Chapter 13 Bankruptcy

Interviewer: How is that payment determined again? Is there a specific amount someone has to be making annually?

Court Koehler: There’s not necessarily any kind of specific amount. With the Chapter 13 bankruptcy, you are required to have sort of a regular income in order to pay the plan. From there, the plan is crafted by according to how much debt you have and what kind of debt needs to be paid off.

You Are Required to Pay off Secured Debt over the Chapter 13 Payment Plan

The actual calculation of how much you’re going to pay per month is really complicated and it varies greatly from case to case. As a brief overview, what you are required to pay off in the Chapter 13 plan is any of the back payments that you have on your secured debt. So if you’re behind on your mortgage, say, $2,000 or $3,000 then you’ll have to pay that amount over the period of the plan; the same thing with car loans and other secured loans.

There are also attorneys’ fees, for example, my fees that will be put into the plan. That’s another nice feature of the Chapter 13 is that you’re paying your attorneys’ fees. Most of them are being paid through the course of the plan. You don’t have to come up with a large lump sum to pay the attorney at the beginning of the process.

A Portion of Your Unsecured Debt Is Paid Back during the Payment Period

From there, there is a portion of your unsecured creditors that are paid back. That’s determined by your income level as well and your expenses. Some people end up not having to pay any money to their unsecured creditors, and some people have to end up paying a bit more. It just depends on a case by case basis.

By Court Koehler

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