Despite recent improvement in the economy the circumstances of the last year have taken their toll on the financial stability of American households. Many are unable to manage their finances as they did before. Bankruptcy may be an option for those individuals dealing with overwhelming debt. This blog will explain the ways in a Chapter 13 bankruptcy may be a benefit. This type of bankruptcy is also called a “wage earner’s plan” as it requires some type of regular income to make the monthly payment over the life of the plan.
For further information regarding bankruptcy please visit our bankruptcy practice page at https://finneylawfirm.com/practice-areas/bankruptcy/.
Preparation for filing Bankruptcy
Debtors who seek the protection of the bankruptcy court must begin by providing information regarding unsecured debts, secured debts, income, expenses, and assets to their attorney in order to obtain proper legal advice on what chapter of bankruptcy is appropriate for them. In addition, this information is necessary to fill out the required bankruptcy forms. Your attorney will provide a list of documents to gather including but not limited to car titles, security agreements, life insurance policies, bills, tax returns, pay stubs, proof of other income, bank statements, and deeds and mortgages. This is the most difficult part of filing bankruptcy as it can be time consuming and frustrating. It is also the most important part of filing if you want proper legal advice regarding your financial situation and suitability to file bankruptcy.
Chapter 7 is what most debtors would prefer to file due to the lower attorney fees and shorter amount of time the case is active. However, chapter 7 is not a solution for every debtor.
Chapter 13 is a repayment plan where the debtor pays a certain percentage back over a three to five year period. This chapter is beneficial for debtors who have too much income to file a Chapter 7, debtors who may lose assets that are not protected by state or federal exemptions, or there may be some benefit the debtor can obtain by filing a Chapter 13 instead of a Chapter 7.
A credit report will be helpful when meeting with a bankruptcy attorney. Anyone can pull a copy of their credit report for free once a year at www.annualcreditreport.com. Even though this is not always a complete list of your creditors it will be a good place to begin. The debtor will then supplement with bills and in some cases their memory of what they owe.
After an attorney reviews your information and documents, a determination will made as to what chapter is advisable to file, if any.
What will follow is further updating of documents and information, and a final meeting to review, refine and sign the bankruptcy documents before filing with the Bankruptcy Court.
Filing chapter 13
When filing a petition with the Bankruptcy Court, whether it is a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, the court imposes an automatic stay that prevents creditors from collecting from the bankruptcy debtor. This is usually the point where the debtor feels a great deal of relief as their phone stops ringing and collection attempts have ceased.
If a debtor files a Chapter 13, a repayment plan will also be filed. This plan details how unsecured creditors will be treated during the course of the Chapter 13. Some creditors have a priority over others and will be treated differently than non-priority unsecured creditors. This includes child support and alimony which must be brought current and taxes which must be paid in full through the plan. In addition, it will propose how to treat secured obligations such as car loans and mortgages.
Unsecured debts such as medical bills and credit card debts will be paid pennies on the dollar with the balance being discharged at the end of the plan. Unfortunately, student loans will be paid pennies on the dollar as well but, as of now, are not discharged at the end of the plan.
The calculation of how much these creditors will be paid depends on the debtor’s disposable income after calculating monthly income and reasonable monthly expenses. If the debtor has assets with equity that was not protected by exemptions, the debtor must pay back the greater of the disposable income or the amount necessary to pay back the unprotected equity.
Some benefits of filing a Chapter 13 include catching up on a mortgage in default, cramming the principal owed on a car loan down to the value of the car rather than what you owe (if purchased more than 910 days prior to filing) and possibly reducing the applicable interest rate. Even though child support and alimony obligations are never discharged in bankruptcy, property settlements are dischargeable in a Chapter 13, not in Chapter 7.
After calculating what will be paid to unsecured creditors, mortgages, mortgage arrearages, car loans, taxes, and/or domestic support obligations a monthly payment will be proposed.
After filing Chapter 13
After filing a Chapter 13, a bankruptcy trustee will be appointed and a 341 Meeting of Creditors will be scheduled. This meeting allows the trustee and creditors to ask questions of debtor and debtor counsel regarding the petition and the plan. These meetings are currently being held telephonically due to the pandemic but that may change in the future. The debtor must make the first monthly payment within thirty days of filing the petition and continue monthly thereafter.
If the trustee or creditors have concerns about the plan provisions the debtor is given time to amend the plan. If the plan is accepted without any objections it is presented to the court for approval. In the alternative if there are outstanding objections to the plan it will be brought before the Bankruptcy Court at a confirmation hearing to make a determination whether it will be approved.
Once the plan is confirmed, the debtor continues with payments for the remainder of the plan period and updates their attorney, the trustee, and the court of changes to their financial situation.
A further benefit of Chapter 13 bankruptcy is that it may be dismissed at any point by the debtor, whereas, a Chapter 7 may only be dismissed with court approval.
At the end of the plan period, if all payments have been made, the debtor receives a discharge of unsecured debt, other than student loans, a mortgage in default should be current, and car loans included in the plan will be paid in full.
If you would like a free consultation with a seasoned bankruptcy attorney, contact Susan Browning at Finney Law Firm, (513) 797-2857. Our firm provides service to Cincinnati, Northern Kentucky and the Dayton areas. As a convenience to our clients, bankruptcy consultations can be held by phone.