When you feel your debts have become insurmountable, you should know there is an alternative to filing a traditional bankruptcy — one that allows you to satisfy creditors while holding onto valuable assets, especially your home. Through a Chapter 13 filing, qualified wage earners can formulate a plan to repay a portion of their debt over a period of three to five years and emerge on a steady financial footing.
Chapter 13 isn’t for everyone. People using it must be regularly employed and their secured debts (like mortgages and car loans) and unsecured debts (like credit card accounts) must be below specified limits. But for debtors who qualify, a Chapter 13 wage earners plan has distinct advantages over a straight Chapter 7 bankruptcy, also known as liquidation.
For one thing, you can avoid a foreclosure on your home. Although Chapter 13 does not relieve you of your mortgage debt, it allows you to restructure payment of mortgage arrears over the lifetime of the wage earners plan. It also allows you to remove second mortgages and home equity lines of credit, a process known as “lien stripping.” Those junior liens are converted to unsecured loans and partially repaid during the plan, with any balances remaining at the end of the plan discharged.
Another major benefit is that unsecured debts need only be partially repaid. The amount you are obligated to pay is determined by your disposable income, which is now much you have left over each month after paying secured debts and meeting basic living expenses. This usually comes out to much less than the full amount of unsecured debt owed.
Chapter 13 may be available when Chapter 7 is not. If you seek to wipe out your debt using Chapter 7, you must satisfy a “means test” that shows you have monthly income less than the median income for households of similar size in the state. If your income is above the median, and you have disposable income (after meeting monthly living expenses) sufficient to pay off even a portion of your unsecured debt, you are ineligible for a Chapter 7 liquidation. However, Chapter 13 has no such requirement.
Finally, there are fewer time restraints on Chapter 13 filings. When you declare Chapter 7 bankruptcy, you can’t do so again for eight years. By contrast, you can file a new Chapter 13 immediately after your first plan is completed and you can do so as often as needed.
While a Chapter 13 repayment plan may be challenging and does not relieve all your debt, completing it successfully gives you a chance to rebuild your credit faster and more efficiently than after a straight bankruptcy.
An experienced bankruptcy attorney can advise you on whether Chapter 13 is the best option for you. Call the Law Office of Phil Hineman, P.C. at (928) 224-3230 or contact me online. I offer flexible appointments, even in the evening and on weekends, as well as free phone consultations.