Chapter-13–Bankruptcy-Basics

Chapter 13 – Bankruptcy Basics

A chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.”

The process

Once you have proved your eligibility and have submitted required documents, the court will work out a repayment plan for you. Based on your income, your repayment plan will either run for three or five years.

It is in your interest to faithfully remit your monthly payments since the court discharges any remaining debts, which can be substantial. What’s more, once the repayment plan is put into action, your creditors cannot charge interest on your debts. You only need to pay off the principal balance of each debt and finish the repayment process quickly.

Advantages:

○ Protects your house: Under Chapter 13 bankruptcy plan, your home comes under the protection of the US bankruptcy court. It stops foreclosures and also prevents your creditors from repossessing your car.

○ Creditors not allowed to harass: Law prohibits creditors from contacting you in any manner for repayment of the loan. This period may last from 36 to 60 months. In case you receive any calls from your creditors, you can report them or contact them through your attorney.

○ Eliminates Second and third mortgages: If you owe more on your mortgages than your house is worth, Chapter 13 bankruptcy can save you from second and third mortgages. It helps to convert second and third mortgages  from secured debts to unsecured debts. And bankruptcy Chapter 13 gives last priority to unsecured debts, and you can cover it through your payment plan.

Chapter 13 repayment plan

In the absence of any set amount, it is up to the bankruptcy court to decide what amount you have to pay in a Chapter 13 case. You need to pay ‘priority debts’ in full. These include alimony, child support, and tax obligations. You have to regularly pay for secured debts, such as car loans and mortgages.

As regards unsecured debts, you may pay back anywhere from zero percent to 100 percent, depending on the amount of your disposable income at the end of each month. What’s heartening is your monthly payments on unsecured debt don’t go up, whether you have a $20,000 or $220,000 credit card debt. The monthly payment plan remains the same.

As far as car loans are concerned, you can lower the interest rate or even the balance on your car under Chapter 13. This is because the bankruptcy law lets you pay only the fair market value of your car if you have purchased it more than 910 days before filing for bankruptcy. In case, it is less than 910 days; you can pay lower interest rate than what you were paying before.

In Georgia, the current rate of interest on cars is 5.25 percent. Georgia bankruptcy courts permit you to pay to car creditors the prime interest rate on the day of filing plus two percent as a reasonable interest.

Payment of funds to the trustee

In Georgia, the funds are automatically deducted from your paychecks and paid to the Chapter 13 trustee, unless you are self-employed. Some part of this fund goes as trustee’s commission. The remaining funds are distributed among the creditors, based on the terms of the confirmed Chapter 13 plan.

You may also resort to payments ‘outside the plan’. This constitutes monthly regular payments on house and vehicle, domestic support obligations, student loans and the like.

Failure to make scheduled Chapter 13 payments

It is best not to miss out on scheduled Chapter 13 bankruptcy payments. But, if you do, take a quick action to remedy the situation. This is because the trustee or one of your creditors may file a motion to dismiss the case.

In such a situation, you need to file a written response to the motion. Failure to do so may compel the court to grant dismissal of the case without a hearing.