Part I: Is Chapter 13 Right for You?

1. How Chapter 13 Works

• An Overview of Chapter 13 Bankruptcy
• Debts Discharged in Chapter 13 Bankruptcy
• Chapter 13 Bankruptcy and Foreclosure
• Special Chapter 13 Features: Cramdowns and Lien Stripping
• Is Chapter 13 Right for You?
• Alternatives to Bankruptcy

2. The Automatic Stay

• How the Automatic Stay Works
• How Long the Stay Lasts
• How the Stay Affects Common Collection Actions
• How the Stay Affects Actions Against Codebtors
• When the Stay Doesn’t Apply
• Evictions

3. Are You Eligible to Use Chapter 13?

• The Effect of a Previous Bankruptcy Discharge
• Business Entities in Chapter 13
• Chapter 13 Debt Limits
• Providing Income Tax Returns
• Child Support and Alimony Payment Requirements
• Annual Income and Expense Reports
• Drafting a Repayment Plan
• Paying to Keep Nonexempt Property
• You Must Take Two Educational Courses

4. Do You Have to Use Chapter 13?

• What Is the Means Test?
• The Means Test
• Classifying Your Debts
• Forced Conversion to Chapter 13

5. Can You Propose a Plan the Judge Will Approve?

• Repayment Plan Calculations: An Overview
• If Your Current Monthly Income Is Less Than Your State’s Median Income
• If Your Current Monthly Income Is More Than Your State’s Median Income
• Understanding Property Exemptions

6. Making the Decision

 

Part II: Filing for Chapter 13 Bankruptcy

7. Complete Your Bankruptcy Forms

• Required Forms, Fees, and Where to File
• For Married Filers
• Voluntary Petition for Individuals Filing for Bankruptcy (Form 101)
• Forms Relating to Eviction Judgments (Forms 101A and 101B)
• Schedules (Forms 106A/B–J)
• Summary of Your Assets and Liabilities and Certain Statistical Information (Form 106.Sum)
• Declaration About an Individual Debtor’s Schedules (Form 106.Dec)
• Your Statement of Financial Affairs for Individuals Filing for Bankruptcy (Form 107)
• Your Statement About Your Social Security Numbers (Form 121)
• Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period and Chapter 13 Calculation of Your Disposable Income (Forms 122C-1 and 122C-2)
• Disclosure of Compensation of Attorney for Debtor (Form 2030)
• Mailing Matrix
• Income Deduction Order

8. The Chapter 13 Plan

• National Chapter 13 Plan (Form 113)
• Chapter 13 Plan Requirements
• Repayment of Unsecured Debts: Allowed Claims
• Drafting Your Plan
• Sample Plan

9. Filing the Bankruptcy Case

• Other Documents You’ll File
• Paying the Filing Fee
• Electronic Filing
• Emergency Filing
• After You File

10. Handling Routine Matters After You File

• The Automatic Stay
• Dealing With the Trustee
• Make Your First Payment
• If You Operate a Business
• The Meeting of Creditors
• Changing Your Plan Before the Confirmation Hearing
• The Confirmation Hearing
• Changing Your Plan After a Failed Confirmation Hearing
• Amending Your Bankruptcy Forms
• Filing a Change of Address
• Filing Tax Returns
• Redacting Sensitive Information
• Filing Annual Income and Expense Statements
• Personal Financial Management Counseling
• Chapter 13 Debtor’s Certifications Regarding Domestic Support Obligations and Section 522(q) (Form 2830)

 

Part III: Making Your Plan Work

11. Common Legal Issues

• Filing Motions
• Dealing With Creditors’ Motions
• If an Unsecured Creditor Objects to Your Plan
• Handling Creditor Claims
• Asking the Court to Eliminate Liens

12. Carrying Out Your Plan

• Your Income Increases
• Selling Property
• Modifying Your Plan When Problems Come Up
• Attempts to Revoke Your Confirmation
• When You Complete Your Plan

13. If You Can’t Complete Your Plan

• Dismiss Your Case
• Convert Your Case to Chapter 7 Bankruptcy
• Seek a Hardship Discharge

14. Life After Bankruptcy

• Rebuilding Your Credit
• Attempts to Collect Discharged Debts
• Postbankruptcy Discrimination
• Attempts to Revoke Your Discharge

 

Part IV: Help Beyond the Book

15. Hiring and Working With a Lawyer

• What Does Legal Representation Mean?
• How to Find a Bankruptcy Lawyer
• What to Look for in a Lawyer
• Paying Your Lawyer
• Working With Your Lawyer

16. Legal Research

• Where to Find Bankruptcy Law
• Bankruptcy Background Materials: Overviews, Encyclopedias, and Treatises
• Finding Federal Bankruptcy Statutes
• Finding the Federal Rules of Bankruptcy Procedure (FRBP)
• Finding Local Court Rules
• Finding Federal Court Bankruptcy Cases
• State Statutes
• State Court Cases
• Other Helpful Resources

Glossary

Appendix

• How to Use the Downloadable Forms on the Nolo Website
• List of Forms Available on the Nolo Website

Index

Chapter 1
How Chapter 13 Works

Chances are good that you’ve picked up this book because your debts have become overwhelming. Maybe you’re facing foreclosure on your home or repossession of your car. Or perhaps you’re a high-income earner whose debts have grown beyond your ability to repay them. If so, Chapter 13 can help.

If you’re like many, you might prefer to file for Chapter 7 bankruptcy—the chapter individuals file most frequently. Not only is Chapter 7 over in a matter of months, but filers don’t repay creditors in a repayment plan.

But not everyone qualifies for Chapter 7, and Chapter 13 offers benefits that Chapter 7 doesn’t—some of which are so helpful that people who can use Chapter 7 sometimes choose Chapter 13 instead.

For instance, the Chapter 13 repayment plan allows a debtor to repay obligations over time, often at a discount. Also, the ability to catch up on back payments lets filers keep a house, car, or other property they’d otherwise lose. Others use the three- to five-year plan to pay off debts they can’t eliminate in bankruptcy, such as back taxes or child support arrearages. These problems can’t be solved using Chapter 7.

If you think Chapter 13 might help you and want to know more about how it works, this is the book. You should find answers to all your questions.

However, it’s not a DIY book and stops short of giving you all the forms and instructions needed to prepare your own Chapter 13 bankruptcy. The reality is that very few people can complete a Chapter 13 case without attorney representation. (See “Do You Need a Lawyer?” below.)

That said, times are changing, and filing for bankruptcy is getting easier—primarily because the forms are now simpler to use. Even so, the forms don’t explain bankruptcy law or procedure. If you file on your own, you’re responsible for learning the process and understanding how a filing would affect your income and assets, which can be a daunting task.

But we’re jumping ahead. You must first decide whether Chapter 13 is right for you, and there’s a lot to know.

This chapter gets you started by providing an overview of all aspects of Chapter 13 bankruptcy, as well as options for dealing with your debts outside of bankruptcy. It’s intended to give you a taste of what filing Chapter 13 involves and its benefits.

As you go through it, don’t expect to grasp everything right away—it’s a complicated area of law, so naturally, getting the hang of it involves a learning curve.

Plus, help is always at your fingertips. Each topic discussed in the first chapter is covered in more detail in the following chapters (we tell you where). Feel free to skip ahead if you’re having difficulty grasping a concept but want to learn more.

An Overview of Chapter 13 Bankruptcy

Typically, a Chapter 13 filer has a good income and can afford to repay some amount to creditors, but perhaps not the entire balance owed. Other debtors need time to catch up on bills they can’t erase in bankruptcy without the looming threat of a collection lawsuit or wage garnishment.

The primary difference between Chapters 7 and 13 is the time required to complete the chapter. The lengthy Chapter 13 plan gives debtors the ability to force creditors into a Chapter 13 payment plan, which is quite powerful. Unlike a quick Chapter 7 case, a Chapter 13 filer can restructure bills over three to five years and sometimes even pay less than what’s owed.

Also, Chapter 13 filers keep all property regardless of its value (although this comes at a price—more about this later). In Chapter 7, filers can keep only the things necessary to work and live, such as a modest car, some equity in a home, household furnishings, and a retirement account. All other property gets sold for the benefit of creditors.

Chapter 13 has other valuable benefits, too, discussed below in “Reasons to Choose Chapter 13.” However, as mentioned above, most people would agree that the most powerful is that it can help you save your home.

Chapter 13 bankruptcy allows you to catch up on mortgage payments through your plan and avoid foreclosure. Sometimes, you can even eliminate junior mortgages and home equity loans. (See Ch. 8.)

Do You Need a Lawyer?

For the vast majority of Chapter 13 filers, the answer is “yes.” Even bankruptcy courts strongly suggest that filers retain counsel.

It’s not that people can’t understand how Chapter 13 bankruptcy generally works or fill out the petition and accompanying schedules and forms. The problem is that Chapter 13 law can be tricky. The difficulty is understanding what will happen to assets, how much to repay creditors, and other complicated Chapter 13 repayment plan requirements.

Calculating plan payments is complicated without the assistance of computer software, which is expensive and generally requires bankruptcy knowledge to complete correctly. It is also not uncommon for the trustee— the official responsible for overseeing your case—or creditors to challenge or object to various aspects of a filer’s proposed plan.

You might have to argue against objections, negotiate with creditors, or modify your plan. Most Chapter 13 plans need at least one modification before receiving court approval, even when prepared by an attorney.

Even though we believe that most Chapter 13 filers benefit from legal representation, it’s still important to understand the Chapter 13 process, including options for dealing with debts and property, such as reducing loan amounts through “lien stripping” or a “cramdown.” You can also run some preliminary numbers to determine if Chapter 7 is an option for you and if you earn enough to fund a Chapter 13 plan. (Chs. 4 and 5 address Chapter 7 qualification and Chapter 13 income requirements. See Ch. 15 for more about working with a bankruptcy lawyer.)

Armed with the knowledge in this book, you’ll be better positioned to help your attorney represent you effectively.

Filing Your Papers

Be prepared to disclose all aspects of your financial situation on the bankruptcy forms provided by the bankruptcy court. You’ll list income, property, debt, and financial transaction information going back up to 10 years in some instances.

You’ll also complete two forms to determine how long your repayment plan must last. If your gross income exceeds the state median for your family size, your plan must last five years, with a few exceptions. You can propose a three-year plan if your income is less than the median.

Most forms are identical to those you’d file in Chapter 7. However, you’ll also

prepare a Chapter 13 repayment plan for court approval. The plan shows how you propose to pay mandatory obligations in full, such as support and tax arrearages. You must also pay mortgage and car loan arrearages if you plan to keep the house or car (this applies to any debt secured by property).

But that’s not the extent of your plan responsibilities. Any income remaining after paying mandatory debts and deducting allowed monthly living expenses is considered “disposable income.” Your other debts, known as “nonpriority unsecured” debts, share your disposable income. At the end of your three- or five-year plan, any remaining nonpriority unsecured debt balance gets eliminated or “discharged,” with some exceptions, student loans being the most notable—you’ll remain responsible for those without taking additional steps. (See Ch. 8.)

TIP
This overview purposely omits information, and more plan requirements exist. However, this is how a plan works at its core. We’re introducing only the basics to prevent confusing you with too much information early on. As you’ll learn later, you might pay more, or possibly less, because of other plan requirements, which we explain in more detail below in “The Repayment Plan” section. Still, this chapter is an overview only. We address all topics thoroughly in the dedicated chapters.

You’ll also have to complete coursework and provide documentation verifying the figures included in your bankruptcy paperwork. For instance, you’ll need to do the following:

• file a certificate showing you participated in a credit counseling program during the 180 days before filing
• complete a debtor education course before making your final plan payment
• submit pay stubs from the 60 days before you file
• provide proof that you’ve filed your federal and state income tax returns for the previous four years, and
• if you’re a business owner, profit and loss statements (business owners can file for Chapter 13, but not the business itself).

Depending on your local jurisdiction’s rules, you’ll either file the financial documents with the court or provide them to the trustee. (Chs. 7 through 9 discuss the bankruptcy forms, repayment plan, and filing process in detail.)

Costs

Everyone who files for Chapter 13 must pay the filing fee of $313. You’ll also pay about $60 to a credit counseling agency for your prefiling credit counseling and postfiling debt management counseling.

If you decide to hire a lawyer to help you with your case, you can expect to pay an additional $3,500 or more in legal fees, depending on the prevailing rate in your area.

You likely won’t pay the entire legal fee before your lawyer files your case. Many attorneys will ask you to make an initial payment, which could be as low as $100 but likely more. In Chapter 13, you can pay the remaining legal fees in installments through your plan.

If you’re wondering how your lawyer decides your initial deposit amount, the answer might surprise you, although you’ll recognize its practicality. Your lawyer will consider the likelihood of you completing your plan. If your case gets dismissed early, the lawyer might not receive all the installments, leaving the lawyer partially unpaid.

The Repayment Plan

As discussed briefly above, you’ll submit the repayment plan with your other bankruptcy papers or shortly after your initial filing.

The plan shows your creditors, the trustee, and the judge that you have enough income to pay mandatory amounts and explains how much disposable income remains to pay nonpriority unsecured debts—typically, credit card balances, medical and utility bills, and personal loans.

Debts You Must Repay Fully
Chapter 13 requires you to pay certain high-priority debts in full through the plan. Domestic support arrearages and recently incurred income tax debt are the most common debts filers must pay fully. These amounts can be large, often contributing to hefty plan payments. To understand how much you’d pay, divide the balance owed by the number of plan months (36 or 60).

You’ll do the same calculation for mortgage and car loan arrearages, which you must pay to keep a car or home. Again, this amount can increase plan payments substantially, depending on how far behind you’ve fallen. But that’s not all. You must also be able to keep up with monthly living expenses, including mortgage and car payments.

What Is Disposable Income?
Any income remaining after paying required debts is disposable income. Your nonpriority unsecured creditors—or all creditors other than those referenced above—are entitled to your disposable income for the life of your plan.

Debts You Can Pay Partially
You don’t need enough disposable income to repay your remaining creditors fully. The trustee divides it between your nonpriority unsecured creditors on a pro rata or percentage basis. The creditors with the highest balances receive the most significant disposable income portion.

Also, the amount owed to this class of creditors doesn’t change how much you must pay. They share your disposable income.

These are the creditors who often receive “pennies on the dollar.” Except for student loans, any balance left on these debts is erased or “discharged” at the end of the plan.

Typically, the debts falling into this class include credit card balances, medical bills, personal loans, utility debt, and other nonpriority unsecured obligations.

When You Must Pay to Keep Property
You must overcome another hurdle when determining how much you must pay nonpriority unsecured creditors. These creditors must receive at least as much as they would have if you’d filed for Chapter 7 instead. (See Ch. 3.)

Here’s a simple way to think of it: The amount you pay to all creditors other than secured creditors (don’t include payments to a mortgage or vehicle lender) must meet or exceed the value of the property you’d have given up in Chapter 7. This formula ensures that your creditors aren’t unfairly prejudiced by the rule that allows you to keep property in Chapter 13 that would be sold in Chapter 7.

This test is known as the “best interest of creditors” test. To determine the “best interest” amount, calculate the value of all property you can’t protect with a bankruptcy exemption. Then, subtract the costs, commissions, and fees necessary to sell the property, including the Chapter 7 trustee’s fee, which can be substantial. The final figure is the minimum amount you must pay unsecured creditors.

If you have enough disposable income to pay more, you’ll pay your disposable income up to 100% of your debt balance. You don’t have to pay more than you owe.

TIP
Why would someone pay 100% of what they owe in Chapter 13? It often happens when someone with a significant amount of disposable income uses Chapter 13 to pay off nondischargeable debts, like taxes or support obligations. If their disposable income covers 100% of their debts, they must fully repay every debt they owe if they want to use Chapter 13 to stop creditor collections during the repayment period. Even though the filer wouldn’t get a discount on the debt, there’s still a benefit to filing for Chapter 13. A filer can spread payments over five years, forcing a creditor to accept a five-year payment plan.

Repayment Period Length
You must propose a three- or five-year repayment plan depending on your income. A filer whose income is more than the median income in their state must propose a five-year repayment plan unless the plan pays 100% of the filer’s unsecured debt.

Filers whose income is less than the state median can choose between Chapters 7 and 13. If they use Chapter 13, these filers can propose a three-year repayment plan and use their actual expenses to calculate how much they’ll devote to the plan. Such filers sometimes opt to pay a smaller payment over five years to increase their chances of getting their plan approved by the court. (For more qualification and plan length information, see Chs. 4 and 5.)

Coming Up With a Plan the Judge Will Approve
You can’t proceed with a Chapter 13 bankruptcy unless a bankruptcy judge approves or “confirms” your plan. You’ll have to propose a plan that meets all requirements and prove you have enough income to fund it.

However, some judges will confirm a “zero percent” plan that doesn’t repay any portion of credit card balances or other non-priority unsecured debts. Filers use it if they don’t have any disposable income left after paying child support arrearages and other required obligations. It’s an excellent benefit if you have large nondischargeable debts because it offers the best of both Chapters 7 and 13. You can get a complete discharge of qualifying debt along with time to pay off a nondischargeable tax bill or domestic support obligation without worrying about a potential wage garnishment.

The Automatic Stay

When you file for Chapter 13 bankruptcy, the automatic stay immediately goes into effect. The stay prevents most creditors from taking action to collect a debt against you or your property. For instance, if you’re facing a home foreclosure or a vehicle repossession, the stay will stop the proceeding in its tracks. However, the automatic stay will be limited if the court recently dismissed a bankruptcy case and won’t apply if the court dismissed two recent bankruptcies. (You’ll find more automatic stay details in Ch. 2.)

The Meeting of Creditors

As soon as you file your bankruptcy papers, the court will send out a notice of a “meeting of creditors” or “341 hearing” that will take place within 20 to 40 days after your filing date. If you and your spouse filed jointly, you’ll both attend.

You’ll each need to bring two forms of identification—a picture ID and proof of your Social Security number.

The Chapter 13 bankruptcy trustee conducts the creditors’ meeting in a conference room, not a courtroom. No judge will be present, but filers must cooperate with the trustee.

A typical creditors’ meeting lasts less than 15 minutes. The trustee will ask any questions raised by the information entered in the forms. The trustee will be interested in the legality of your proposed repayment plan and your ability to make the payments.

The trustee will also require proof that you’ve filed your tax returns for the previous four years. Ultimately, you won’t be able to proceed unless your tax filings are current. (See Ch. 8 for more on Chapter 13 plans.)

RESOURCE
Help if you’re behind in tax payments. Many people who owe taxes benefit from professional help from a tax attorney, an enrolled agent (licensed by the IRS), or a tax preparer. For more information on getting current on taxes and professional help, read Stand Up to the IRS, by Frederick W. Daily and Stephen Fishman (Nolo).

When the trustee finishes asking questions, any creditors who’ve appeared will have a chance to question you. It’s unlikely that a creditor will show, but if one does, you’ll be required to answer questions related to your past and present financial circumstances.

Disgruntled creditors or those suspecting fraud might come to gather evidence to support their case, much like litigants do in a deposition. They’ll likely evaluate whether to proceed after the hearing. If they do, expect your answers to be used against you.

By contrast, filers often learn whether the trustee has an objection to the plan. You might be able to modify it to accommodate the trustee. If you can’t resolve the issue, the trustee or creditor will object in writing in a formal motion, and a bankruptcy judge will decide the matter at the plan confirmation hearing (more below).

Plan Objections

A creditor who has an objection to the proposed plan is unlikely to voice that objection at the creditors’ meeting. Instead, the creditor will file a motion with the court. The trustee will also file a motion if you can’t resolve a problem informally.

For instance, a trustee or creditor might claim your plan isn’t feasible if you don’t have enough income to make the required plan payment.

But that isn’t the only objection you might face. Creditors often claim they’re legally entitled to more money, or that you could pay more if you decreased overly luxurious living expenses.

The trustee will often weigh in on a creditor’s position, and, as a general rule, the judge will go along with the trustee unless your lawyer can point out an error.

The Confirmation Hearing

Chapter 13 bankruptcy requires at least one appearance by you or your attorney before a bankruptcy judge. At this “confirmation hearing,” usually held a few weeks after the creditors’ meeting, the judge either confirms your proposed plan or sends you back to the drawing board for various reasons—usually because your plan doesn’t meet Chapter 13 requirements. For example, a judge might reject your plan because you don’t have enough income to pay off your priority creditors, like recent taxes or support arrearages, while staying current on your secured debts, such as a car note or mortgage.

You can amend your proposed plan until you get it right or the judge decides it’s hopeless. During this time, though, you must make payments to the trustee under your proposed plan. Each amendment requires a new confirmation hearing and appropriate written notice to your creditors. Once your plan is confirmed, it will govern your payments for the three- to five-year repayment period. (For more on the confirmation hearing, see Ch. 10.)

Possible Additional Court Appearances

If your plan is prepared perfectly, your confirmation hearing could be the only time the bankruptcy judge deals with your case. However, additional court appearances by you or your attorney might be necessary to do the following:

• confirm your repayment plan if you need to modify or change your plan value an asset, if your plan proposes to pay less for a car or other property and the creditor objects to the valuation
• respond to requests by a creditor or the trustee to dismiss your case or amend your plan
• respond to a creditor who opposes your right to discharge a particular debt (perhaps claiming that you incurred the debt through fraud)
• discharge a type of debt that can be discharged with court approval, such as a student loan, or
• eliminate a lien on your property that would survive Chapter 13 unless the judge removed it. (See Ch. 11.)

Making Your Payments Under the Plan

You’re required to make your first proposed plan payment within 30 days after filing for bankruptcy. If the bankruptcy court confirms your plan, the trustee will continue distributing your payment according to the plan terms. If your Chapter 13 case never gets off the ground, the trustee will return the money to you, less administrative expenses and any car loan amounts or other secured payments the trustee was required to make.

Once confirmed, you’ll continue to make plan payments to the bankruptcy trustee. In some jurisdictions, the trustee will require you to agree to an order that takes the payments from your bank account or paycheck. This option isn’t available everywhere, although many filers would like to take advantage of it. The trustee uses your monthly payments to pay the creditors according to your plan. The trustee also collects a statutory fee of roughly 8% to 10% of the plan payment.

If you can show a history of uneven income payments over the year, for example, quarterly royalty payments or seasonal income fluctuations common in construction work, your plan might provide for payments when you typically earn income, rather than every month. Still, in most cases, it will be monthly.

If Something Goes Wrong

Three to five years is a long time. What happens if you can’t make a payment because of a change in your income or life circumstances and can’t complete your plan?

If you miss only one or two payments, the trustee might agree to let you make up the difference. But you’ll need to make arrangements with the trustee quickly before the trustee files a motion asking the bankruptcy judge to dismiss the case. You’ll also need to pay extra to cover any late fees assessed to avoid being surprised by an outstanding balance at the end of your case.

If your income is reduced permanently, you might be able to modify the plan to lower your monthly payment. However, it isn’t financially feasible in many cases because the bankruptcy rules will still dictate the amount you must pay.

If you can’t complete the plan, other options include converting your bankruptcy to Chapter 7 and obtaining a “hardship” discharge from the court. Otherwise, Chapter 13 bankruptcies are dismissed without a discharge. If the court dismisses your case, you’ll owe your creditors the original debt balance and accrued interest minus any payments made. (See Chs. 12 and 13 for more on what happens if you can’t complete your plan.)

Personal Financial Management Counseling

Before you make your last plan payment, you’ll have to complete a debtor education course covering personal financial management and file a form certifying that you did so before you get your discharge. This course covers basic budgeting, managing money, and responsibly using credit. (See Ch. 10 for more on this requirement.)

After You Complete Your Plan

Before the court issues a discharge and closes the case, you must certify you’re current on ongoing child support and alimony obligations and file proof that you’ve completed debt management counseling. The court will discharge all remaining obligations other than long-term debts you’re not required to pay in full, like mortgages and student loans. For instance, if you have $40,000 in credit card debt and pay off $10,000 through the plan, your discharge will erase the remaining $30,000 once you complete all plan requirements. It will work the same way for other dischargeable debts.

Example: Kaitlyn owes $60,000 in credit card debts, $60,000 in student loans, and $2,000 in alimony. Kaitlyn pays the alimony arrears in full as required and 10% of her credit card and student loan debt. The discharge will erase the remaining credit card balance, but she’ll still owe her $54,000 student loan debt unless she files a lawsuit and convinces the judge to discharge it because of undue hardship.

Practically speaking, most people will emerge from Chapter 13 bankruptcy without debt except for student loans and mortgage balances. (See “Which Debts Are Discharged in Chapter 13 Bankruptcy,” below, for more information.)

Debts Discharged in Chapter 13 Bankruptcy

You’ll take care of most debts in your Chapter 13 case by paying them off or wiping them out. But a few exceptions exist.

Debts You Can Discharge

Generally, whatever you still owe on dischargeable debts will be eliminated at the end of your plan, including most credit card debts, medical bills, lawyer fees, court judgments, and personal loans. You can also discharge mortgages and car loans.

if you return the property to the lender. These rules apply to both Chapter 7 and Chapter 13 cases. Debts you can discharge in Chapter 13 but not Chapter 7 include:

• nonsupport-related debts owed to an ex-spouse arising from a divorce or separation agreement
• debts incurred to pay taxes (for instance, you can discharge the balance of a credit card used to pay taxes)
• noncriminal government fines and penalties
• debts for willfully and maliciously damaging property
• debts for loans from a retirement plan, and
• debts that couldn’t be discharged in a previous bankruptcy.

Debts You Can’t Discharge

After completing a plan, many people are free of all debt or receive a discharge for any remaining balances owed. But that’s not always the case. Debts that could survive a Chapter 13 bankruptcy include:

• debts that you don’t list in your bankruptcy forms
• student loans (unless you can show hardship)
• collateralized loans that wouldn’t usually be paid off during the plan period, such as a mortgage (if you keep the property), and
• debts incurred after your Chapter 13 filing date.

Debts You Can’t Discharge If the Creditor Successfully Objects

Some types of debts will survive your bankruptcy only if the creditor files papers and goes to court to prove that the debt shouldn’t be discharged. For example, suppose a creditor successfully claims a debt arose from your fraudulent actions, such as recent credit card charges for luxuries. Those debts will remain after your bankruptcy unless you paid them fully during your repayment plan.

Chapter 13 Bankruptcy and Foreclosure

If you’re behind on your mortgage payments or facing foreclosure, Chapter 13 bankruptcy might be able to help you keep your home. It can do this by allowing you to permanently stop the foreclosure and catch up on back mortgage payments through your plan.

When the Automatic Stay Can Stop Foreclosure

If you’re facing foreclosure, in most situations, filing a Chapter 13 bankruptcy will immediately stop the foreclosure process. However, there are exceptions if you filed for bankruptcy within the previous two years or if a lender proceeded with foreclosure after the court dismissed a previous bankruptcy case. These provisions are in place to prevent a filer from repeatedly dismissing and refiling Chapter 13 cases to stall foreclosure indefinitely. (See Ch. 2 for more about home foreclosures.)

 

Catching Up on Mortgage Arrears Through Your Chapter 13 Plan

You must remain current on a secured debt, such as your house payment, if you want to keep the property. When you signed your loan documents, you agreed that the bank could take the house if you failed to live up to your obligation.

The lien you gave the lender remains in place even if you file for bankruptcy. So, to stay in the home, you must continue paying for it. Otherwise, the lender can ask the bankruptcy judge to lift the automatic stay and allow the lender to recover the property using the lien rights. This request would be granted in most cases.

One of the benefits of Chapter 13 is that it allows you to include your past-due mortgage debt in your Chapter 13 plan. You can continue making your monthly payment, pay the arrears back over the length of your plan, and remain in the house.

The same is true of past due home- owners’ association assessments—you can catch up through your plan. As long as you keep making your regular mortgage payments (and your ongoing HOA assessments) and your Chapter 13 plan payments, your lender cant foreclose.

Chapter 7 bankruptcy, on the other hand, doesn’t provide a way to catch up on mortgage arrears. For this reason, Chapter 13 bankruptcy is often the best avenue for saving your home if you’re behind in your mortgage or HOA assessments.

Deficiency Balances Are Discharged in Bankruptcy

A deficiency occurs when the amount you owe on your home exceeds the value of the home. In many states, after foreclosing on your home, the mortgage lender has the right to sue you for the deficiency or collect it without a lawsuit. If you’ve lost your home to foreclosure, you can discharge any mortgage deficiency in Chapters 7 and 13.

Special Chapter 13 Features: Cramdowns and Lien Stripping

You might be able to reduce the amount of a secured loan (for example, your car loan) to the property’s actual value in a “cramdown.” Also, you might be able to get rid of second or third mortgages, HELOCs (home equity lines of credit), or home equity loans using “lien stripping.” You’ll find a description of the qualifications that must be met below.

TIP
You might be able to modify your mortgage through nonbankruptcy avenues. Although you can’t modify a mortgage in the first position on a residential home through bankruptcy, you might be able to negotiate with your lender directly to reduce your interest rate, payments, or more. Or, look into government programs designed to help homeowners modify their mortgages. If you’re interested in pursuing a modification, it’s best to do it before filing for bankruptcy. For more information, check out Nolo’s Foreclosure section at Nolo.com or get The Foreclosure Survival Guide, by Amy Loftsgordon and Cara O’Neill (Nolo).

Cramdowns: Reducing Secured Loans to the Value of the Collateral

A cramdown might be beneficial if you owe more on a secured loan than the value of the collateral (the property pledged to guarantee loan payment). Cramming down a loan reduces the amount owed to the collateral’s value without the lender’s agreement. While a cramdown sounds great, there’s a catch—you must pay the reduced balance in full through your Chapter 13 plan. So while it might sound promising, only high-earning filers can afford to cram down the amount owed on a high-value vacation home or similar property.

Property Eligible for Cramdown
You can only use a cramdown on loans secured by certain types of property. Significantly, you can’t cram down mortgages on your personal residence. But you might be able to use it on a mobile home mortgage or a mortgage for a multiunit building if you live in one of the units. Mortgages on your investment properties, such as rental property, a second home, or commercial property, are eligible. A cramdown is also available, subject to certain limitations, for car loans and other personal property loans.

Car loans. Cramdowns are often used for car loans. There are a few restrictions to keep in mind, however. Your bankruptcy lawyer can explain your jurisdiction’s requirements.

CAUTION
You lose the benefit of cramdown or lien stripping if your case is dismissed or converted to Chapter 7. Loan reductions or lien eliminations you get through cramdown or lien stripping are only good if you complete all of your payments under the Chapter 13 plan (or under a Chapter 11 bankruptcy). If your case is dismissed or converted to a Chapter 7, the secured creditors get their total lien amounts back, less anything paid through your plan.

Other personal property loans. You can cram down debts for personal property other than motor vehicles only if you took out the loan at least a year before you filed for bankruptcy or if the loan wasn’t used to purchase the property pledged to secure repayment.

Real estate loans. You might be able to use a cramdown to reduce a mortgage secured by the following types of properties:

• multiunit buildings (even if you live in one of the units)
• vacation or rental homes
• buildings or lots adjacent to your home that aren’t likely to be considered part of your residence, such as farmland
• mobile homes (these are considered to be personal property), and
• property that isn’t your residence.

How Cramdown Works
In bankruptcy, undersecured debt occurs when you owe more than the value of the property pledged to secure repayment. You can break undersecured debt into secured and unsecured portions. The amount equal to the value of the property is the secured portion. Any amount over the value of the property is unsecured.

The first step in a cramdown is accurately valuing the property. If you and the creditor don’t agree on the value, the court will hold an evidentiary hearing. You and the creditor bring appraisers to testify, and the bankruptcy judge determines the value.

The value becomes the secured amount you must pay through your plan, with interest. The unsecured portion goes into the pot with other unsecured debts that share your disposable income.

Here’s an example of how this works. Suppose you owe $20,000 on a car you bought three years ago. The car is now worth $15,000, leaving $15,000 of the loan secured by the property. You can cram down the loan and pay $15,000 through your Chapter 13 plan. The remaining $5,000 is paid with other unsecured debt, and any remaining balance is discharged at the end of the plan.

Determining the Value of the Property
The appropriate valuation method depends on the type of property you’re valuing.

Real estate and mobile homes. For real estate and mobile homes, use the property’s current market value. This is best accomplished through a formal appraisal— especially if the secured creditor might contest the value. If you don’t anticipate a fight, using comparable sales in your area will be less expensive than paying for a full appraisal.

Personal property. For personal property, use the replacement value of the property. “Replacement value” isn’t the amount to replace the item with a new item. Instead, it’s the amount a merchant could get for a used item of similar age and in a similar condition in a retail environment (as opposed to a fire sale or an auction). You can have the property appraised or use some other method to determine its replacement value.

For motor vehicles, you might be able to use an automotive industry guide, such as the Kelley Blue Book or J.D. Power Values, (formerly known as the NADAguides, created by the National Automobile Dealers Association). Your court will likely have a preference. Start with the retail value rather than the wholesale value and adjust that amount for the car’s condition and mileage. If the car lender disputes the figure, you might need to have the vehicle appraised.

Lien Stripping: Getting Rid of Second Mortgages and Other Liens on Real Estate

With lien stripping, you might be able to eliminate certain second mortgages, HELOCs, and other liens on your real property. Unlike cramdowns, lien stripping can be used to reduce secured debt payments on your residential home. Like a cramdown, it involves valuing the property. Here’s how it works.

If you have more than one mortgage on your property, you can ask the court to value the property and eliminate or “strip off” any mortgage wholly or completely unsecured. (See Ch. 8 for information on the procedure.)

Lien stripping isn’t available for first mortgages. A first mortgage, being the most senior lien on the property, will never be completely unsecured. A second or third mortgage or a HELOC is usually eligible for lien stripping if it is wholly unsecured. A mortgage is wholly unsecured if, after selling the property, the sales proceeds are insufficient to pay any portion of the junior mortgage.

You must file a motion with the court to get the lien stripped. If you win, the court will remove the lien from your property, and the debt will become unsecured.

Example: John and Ellen own a home currently worth $100,000. They have three mortgages—the first is $80,000, the second is $27,000, and the third is $50,000. The first mortgage is entirely secured because it is less than the home’s value. The second mortgage is partially secured because the house’s value is more than the first mortgage ($100,000 – $80,000 = $20,000) and equity remains to cover part of the second mortgage. Because it’s not completely unsecured, it can’t be stripped.

John and Ellen have more luck with their third mortgage, which is completely unsecured. When you deduct the amount owed on the first two mortgages from the value of the house, the result is less than zero ($100,000 – $80,000 – $27,000 = −$7,000). No equity remains to pay any portion of the third mortgage. John and Ellen can strip the entire $50,000 third mortgage.

Like a cramdown, when a mortgage is stripped, the underlying debt becomes unsecured and is paid in your Chapter 13 plan along with your other unsecured debts, such as credit cards and medical bills. These creditors get paid out of your disposable income. Once you’ve completed your plan, any remaining balance gets wiped out with other dischargeable unsecured debt.

CAUTION
Lien stripping isn’t the same as lien avoidance. In Chapter 13 bankruptcy, you might also be able to “avoid” liens, or get rid of them, if the property is exempt. Although the end result might be the same or similar, lien avoidance differs from lien stripping because it hinges on property exemptions (the law allowing you to protect certain property in bankruptcy). To learn more about lien avoidance, see Ch. 11.

Is Chapter 13 Right for You?

For most people, the two choices for bankruptcy relief are Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, you immediately wipe out many debts. Still, in exchange, you must give up any property you own that isn’t protected by state or federal exemption laws.

Some people don’t have a choice between Chapter 7 and Chapter 13 bankruptcy. If your income exceeds Chapter 7 bankruptcy qualifications, you’ll have to use Chapter 13 and repay some of your debt. Likewise, if you don’t have a steady income, your only bankruptcy choice is Chapter 7.

Many people can choose between the two and file under Chapter 7. Whether you want to keep property you’d otherwise lose in Chapter 7 bankruptcy is often the deciding factor when you qualify for both. (See Ch. 4 for qualification information.)

Upper-Income Filers Must Use Chapter 13

If your average monthly income during the six months before filing is higher than the state median, you won’t qualify for a discharge if your total five-year disposable income would:

• satisfy at least 25% of your unsecured debt, or
• amount to $15,150 or more, regardless of the percentage of unsecured debt that amount would pay.

If your gross income exceeds the state’s median income, you’ll complete calculations to determine the amount of your disposable income. (See Ch. 4 for more on this “means” test.)

Reasons to Choose Chapter 7

Because Chapter 7 is relatively fast and doesn’t require payments over time, most people who have a choice opt to file for Chapter 7 bankruptcy. You also don’t need to be current on your income tax filings (although you might run into a problem if the trustee believes you’re not filing because you’re entitled to a significant tax refund). In the typical situation, a case is opened and closed within four months, and the filer emerges without debt except for a mortgage, car payments, and certain types of debts that survive bankruptcy (such as student loans, recent taxes, and back child support).

If you have any secured debts, such as a mortgage or car note, Chapter 7 allows you to keep the collateral as long as you are current on your payments. However, if your equity in the collateral substantially exceeds the exemption available to you for that type of property—meaning that you have more equity than you’re allowed to protect in bankruptcy—the trustee can sell the property, pay off the loan, give you your exemption amount, and pay the remaining amount to your unsecured creditors. If you’re behind on your payments, the creditor can come into the bankruptcy court and ask the judge for permission to repossess the car (or other personal property) or foreclose on your mortgage. Or, the lender can wait until the bankruptcy is over to recover the property.

As a general rule, however, many Chapter 7 filers can keep all or most of their property because they don’t own much or because an exemption protects all property equity. But this isn’t always the case— especially as the economy improves and home equity builds.

Nevertheless, assuming you can qualify, discharge your debt, and protect your property, you’ll likely find it easier—and more effective—to file for Chapter 7 instead of paying into a long-term Chapter 13 plan.

Reasons to Choose Chapter 13

Each bankruptcy chapter solves different problems, which is why people who qualify for both types sometimes choose to file for Chapter 13 instead of Chapter 7.

Chapter 13 bankruptcy makes sense for an income earner in any of the following situations (this isn’t an exclusive list):

• You’re facing home foreclosure or car repossession and you want to keep your property. Using Chapter 13, you can make up the missed payments over time and keep the property. You can’t do this in Chapter 7 bankruptcy and would likely lose the property.
• You owe more on vacation or investment property than the property is worth but would like to pay less to keep it. (Reducing the amount owed to the actual value is possible only if you aren’t using the real estate as your primary residence and can afford to repay the entire reduced mortgage balance through your plan; see “Special Chapter 13 Features: Cramdowns and Lien Stripping,” above).
• You have more than one mortgage and are facing foreclosure because you can’t make all the payments. If your home’s value is less than or equal to what you owe on your first mortgage, you can use Chapter 13 to change the additional mortgages into unsecured debts—which don’t have to be repaid in full—and lower your monthly payments. (See “Special Chapter 13 Features: Cramdowns and Lien Stripping,” above.)
• Your car is reliable and you want to keep it, but it’s worth far less than you owe. You can take advantage of Chapter 13 bankruptcy’s cramdown option (for cars purchased more than 2½ years before filing for bankruptcy) to keep the car by repaying its replacement value in equal payments over the life of your plan, rather than the full amount you owe on the contract. (See “Special Chapter 13 Features: Cramdowns and Lien Stripping,” above).
• You have a codebtor who will be protected under your Chapter 13 plan but wouldn’t be protected if you used Chapter 7 (the creditor won’t be able to collect against the codebtor while you’re in Chapter 13).
• You have a tax obligation, support arrearages, or another debt that can’t be discharged in bankruptcy but can be paid off over time in a Chapter 13 plan (you can avoid a wage garnishment by paying in Chapter 13).
• You owe debts that can be discharged in a Chapter 13 bankruptcy but not in a Chapter 7 bankruptcy. For instance, debts incurred to pay taxes can’t be discharged in Chapter 7 but can be discharged in Chapter 13.
• You have a sole proprietorship business that you would have to close down in a Chapter 7 bankruptcy but that you could continue to operate in Chapter 13.
• You have valuable personal property or real estate that you would lose in a Chapter 7 case but could keep if you file for Chapter 13 (you’ll need to have enough income to pay the unprotected value in the plan).

Alternatives to Bankruptcy

By now, you should have a pretty good idea about what you can hope to get out of a Chapter 13 bankruptcy. However, it would be best to consider some basic options outside the bankruptcy system before deciding whether a Chapter 13 or Chapter 7 bankruptcy is the right solution for your debt problems. This section explores some of your other options.

Do Nothing

Surprisingly, the best approach for some people who are deeply in debt is to take no action at all. You can’t be thrown in jail for not paying your debts (with the exception of child support), and your creditors can’t collect money from you that you don’t have. If you don’t have income and property that a creditor could take, and you don’t foresee having any in the future, you’re likely considered “judgment proof.” Judgment- proof people rarely file for bankruptcy. Here’s why.

Creditors Must Sue to Collect
Except for taxing agencies and student loan creditors, creditors must sue you in court and get a money judgment before they can go after your income and property. The

big exception to this general rule is that a creditor can take collateral—foreclose on a house or repossess a car, for example— when you default on a debt secured by that collateral. (In some states, mortgage servicers must file a lawsuit to foreclose on your house.)

Under the typical security agreement (a contract involving collateral), the creditor can repossess the property without first going to court. However, the creditor can’t go after other property and income for a deficiency without going to court for a money judgment.

To get a money judgment, a creditor must have you personally served with a summons and complaint. In most states, you’ll have 30 days to file a response in the court where you’re being sued. If you don’t respond, the creditor can obtain a default judgment and seek to collect it from your income and property. If you do respond— and you’re entitled to do so even if you think you owe the debt—the process will typically be set back several months until the court can schedule a trial.

Some debtors wait until they’re served with a lawsuit before promptly filing for bankruptcy. If you take this approach, act quickly—especially if the creditor accuses you of fraud. Because you can’t discharge a fraud judgment, you’ll want to file for bankruptcy before the court issues a judgment against you.

Much of Your Property Is Protected
Even if a creditor gets a money judgment against you, the creditor can’t take away essentials such as:

• basic clothing
• ordinary household furnishings
• personal effects
• food
• Social Security or SSI payments necessary for your support
• unemployment benefits
• public assistance
• bank accounts with direct deposits from government benefit programs, and
• 75% of your wages (but more can be taken to pay child support judgments).

The general state exemptions apply whether or not you file for bankruptcy (exemptions are explained in Ch. 4 and found online at www.nolo.com/legal-encyclopedia/bankruptcy-exemptions-state). Even creditors who get money judgments against you can’t take these protected items. (The federal and state bankruptcy-only exemptions available in California and a few other states don’t apply if a creditor sues you in state civil court.)

When You’re Judgment Proof
A judgment is good only if the person who has it—the judgment creditor—can seize income or property from the debtor. For example, a judgment creditor can’t take anything if your only income is from Social Security (which can be seized only by the IRS and federal student loan creditors) and your property is exempt under your state’s exemption laws. Your life will continue as before, although one or more of your creditors might get pushy occasionally (creditors can still call and write letters asking for payment).

If your creditors know that their chances of collecting judgments from you are slim, they probably won’t sue you in the first place. Instead, they’ll simply write off your debts and treat them as deductible business losses for income tax purposes. After some years have passed (usually between 4 and 10), the debt will become legally uncollectible under state laws known as “statutes of limitations.” A statute of limitation won’t help you if the creditor gets or renews its judgment within the time limit.

Because lawsuits typically cost thousands of dollars in legal fees, a creditor that decides you don’t have enough assets to warrant going to court is unlikely to seek a judgment later. Because creditors are reluctant to throw good money after bad, your poor economic circumstances might shield you from trouble.

You should take this with a grain of salt, however. Creditors have been known to change course and pursue more tenuous claims as the economy tightens. Before making your bankruptcy decision, it’s a good idea to research the current collection climate—especially if there’s reason to believe your financial situation is likely to improve. In such cases, it’s usually better to solve the problem by filing for bankruptcy.

CAUTION
Don’t restart the clock. A creditor has only a set amount of time under the relevant statute of limitations to sue you on a delinquent debt. It’s important to know that your actions can reset the statute of limitations and start it running all over again. For instance, you could inadvertently revive an old debt by admitting that you owe it or making a payment (the specifics vary by state). Savvy creditors aware of this loophole might try to trick you into reviving their ability to sue and collect the debt. So unless you want to make good on the debt, the best course of action is often to avoid all discussions with creditors.

Stopping Debt Collector Harassment
Many people file for bankruptcy to stop their creditors from making harassing telephone calls and writing threatening letters. As explained above, the automatic stay stops most collection efforts when you file for bankruptcy. However, you don’t have to start a bankruptcy case to get annoying creditors off your back.

Federal law forbids collection agencies from threatening you, lying about what they can do to you, or invading your privacy. And some state laws prevent original creditors from taking similar actions.

Under federal law, you can legally force collection agencies to stop phoning or writing you by simply demanding that they stop. (This law is the federal Fair Debt Collections Practices Act, 15 U.S.C. §§ 1692 and following.) For more information, see Solve Your Money Troubles: Strategies to Get Out of Debt and Stay That Way, by Amy Loftsgordon and Cara O’Neill (Nolo). Below is a sample letter asking a creditor to stop contacting the debtor.

Sample Letter Telling Collection Agency to Stop Contacting You

SEE AN EXPERT
Your debt collector might be putting money in your pocket. The Fair Debt Collection Practices Act places restrictions on debt collector activity. If a creditor fails to act accordingly, the remedies the act provides include damages and attorneys’ fees. More attorneys are using these remedies because they can earn money without taking it out of a client’s recovery. So, if a creditor uses abusive tactics, consider consulting with a bankruptcy or consumer rights attorney to determine if a lawsuit might be worthwhile. For more information on the act and its remedies, see Solve Your Money Troubles: Strategies to Get Out of Debt and Stay That Way, by Amy Loftsgordon and Cara O’Neill (Nolo).

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