Why File a Chapter 13 Bankruptcy?
- Stop Foreclosure
- Eliminate Your Second Mortgage
- Stop Garnishments and Lawsuits
- Get Rid of Judgments
- Get Your Car Back
- Handle Personal Debt
- Discharge Business Debt
- Eliminate Tax Penalties
A Chapter 13 Bankruptcy filing not only stops garnishments, it can also prevent foreclosure and give you a chance to catch up on missed mortgage or car payments so in most cases you can keep your house and vehicles. In a Chapter 13 Plan you make payments to a Bankruptcy Trustee for a period of three to five years. Depending on your income you may pay only a small portion of what you owe to your creditors. Most IRS or state taxes can also be handled in a Chapter 13.
If you earn too much income to file a Chapter 7, have assets that may not be protected in a chapter 7, or other factors work against it, a Chapter 13 may be your best option.
The Chapter 13 Plan
A Chapter 13 is a reorganization of your debts. At the heart of a Chapter 13 lies the Chapter 13 Plan. In essence this is a proposal of how you will pay back certain creditors, as well as which creditors you will pay through your bankruptcy. Based on a complex formula that takes into account your income, allowable expenses, assets, and certain other factors, you may pay your creditors anywhere from pennies on the dollar on up. At the end of the plan you receive a discharge. If you owed taxes that were dischargeable or were being paid through the plan, those taxes will no longer be owed. Back child support or car payments can also be reorganized. In fact, paying for a vehicle through a Chapter 13 can be very helpful, depending on how much is owed and the value of the vehicle. If you owe more than your vehicle is worth a cram-down may be possible, thereby lowering your interest rate and possibly the balance owed as well.
Taxes in a Chapter 13
Frequently IRS and state taxes can be handled through a Chapter 13. If you owe taxes that are several years overdue, penalties and interest may comprise a large part of what you currently owe. Some tax years may be dischargeable in full, meaning that they are eliminated through the process of the bankruptcy. Other tax years, though not dischargeable, may be paid through the Chapter 13 Plan. Doing so can have a distinct advantage. Tax penalties are eliminated in Chapter 13. This can sometimes reduce the tax burden substantially.
Stripping a Mortgage
Another major advantage of Chapter 13 is that junior liens on real property, like second mortgages, equity lines, and judgment liens, can sometimes be stripped. As an example, an individual owes a first mortgage of $200,000 on a home worth $180,000, and a second mortgage of $90,000 and qualifies to strip the second mortgage; at the end of the bankruptcy that individual will no longer owe anything on a second mortgage–he will only owe the first mortgage of $200,000 and will have eliminated $90,000 of mortgage debt. This is a real advantage when property is underwater as it frequently is these days.
Do You Need an Attorney to file?
Though a simple Chapter 7 can sometimes be filed pro se, meaning prepared and filed by the debtor without the help of an attorney, it is definitely not a good idea to file a pro se Chapter 13. In fact, unless your situation is extremely simple, it is not a good idea to file with an attorney who is new to bankruptcy, or with an attorney who churns out multiple filings cheaply but without much care. As in most areas of life, you usually get what you pay for.
However, a careful, detail-oriented attorney who regularly files Chapter 13 plans and keeps abreast of continuing changes in the law can sometimes work apparent miracles. With good research and imaginative problem solving, many debt problems that seem to have no solution can be fully resolved.