How Does a Chapter 13 Repayment Plan Work?
When you file for bankruptcy, there are two types to choose from: Chapter 7 and Chapter 13. A Chapter 7 bankruptcy is known as a ‘straight bankruptcy.’ Unsecured debt like medical bills and credit card debt are typically erased. Some types of debt, such as student loans and taxes, are not discharged.
A Chapter 13 bankruptcy works a bit differently. Instead of erasing your debts, it reorganizes them. The court approves a monthly payment plan so that you can pay back a portion of your unsecured and secured debt over a period of 3 to 5 years. The monthly payment depends on your income and amount of debt.
When Does it Make Sense to File Chapter 13 Bankruptcy?
If you’ve decided that filing for bankruptcy is the right move, the next step is to speak with an experienced bankruptcy attorney in New York. They will review your case and determine which type of bankruptcy you should file.
Chapter 7 bankruptcy is most popular because it’s faster, cheaper and discharges all debts. But for the purpose of this post, we’re going to discuss the benefits of filing for Chapter 13 bankruptcy and how you can expect your payments to be arranged.
Let’s look at some of the reasons why you might want to file Chapter 13:
- Pay what you can afford. Your monthly payments depend on your income and what you can afford each month.
- Discharge debts you can’t afford to pay back. Most people who file for Chapter 13 bankruptcy only pay back a small portion of their debts. Whatever isn’t paid back is discharged.
- Save your home. You can keep your home in Chapter 13 bankruptcy by paying back past due payments on your mortgage over 3-5 years. This way, your home won’t go into foreclosure.
- Remove a second mortgage. If you have a second mortgage, talk to your bankruptcy lawyer in New York about lien stripping, a process that allows you to remove a second or higher mortgage so that you only have your first mortgage.
- Protect a co-signer. Chapter 13 has a special provision that can protect co-signers who may be held liable.
- Less time on credit report. Compared to Chapter 7 bankruptcy that stays on your credit report for 10 years, Chapter 13 bankruptcy only stays for 7 years.
How are the Monthly Payments in Chapter 13 Bankruptcy Determined?
In Chapter 13 bankruptcy, you’ll receive a repayment plan for paying back some or all of your debts. You can consider this repayment plan as a road map that helps you restructure your debts based on various factors such as how much you owe, your income and eligible deductions. The plan is then submitted to the bankruptcy court for approval.
At this time, the judge and your creditors can challenge the plan. If your plan is approved, you’ll make payments either once or twice a month for 3 to 5 years. Your remaining debts may be discharged, which means you only end up paying a fraction of what you owe.
There are two main stages involved in your repayment plan: the Chapter 13 means test and the creation of the plan itself.
- Chapter 13 means test. The means test determines the basic structure of your repayment plan. It looks at your monthly income, the length of your repayment plan and the disposable income you have available to pay back creditors.
- Creating the repayment plan. Once the means test is complete, your lawyer will work with you to create a repayment plan that works for you. This plan is then submitted to the courts for approval.
Making Payments According to Your Chapter 13 Repayment Plan
Once your plan is approved, you’ll make your payments on time, usually once or twice a month. The payments will likely go to your bankruptcy trustee, an individual who divides your payments up among your creditors.
It’s important to make your monthly payments on time, all the time. If you don’t, this could complicate your bankruptcy case. To avoid ending up in the same position you already were, consider putting your monthly payments on autopay.
Final Thoughts on Chapter 13 Bankruptcy
Chapter 13 bankruptcy has a number of advantages over Chapter 7 bankruptcy, but it’s not for everyone. Schedule a consultation with a bankruptcy lawyer in New York who can review your case and determine which type of bankruptcy is right for you.
If you do decide to move forward with Chapter 13, you can feel good knowing that you’re taking charge of your debts and stopping your home from going into foreclosure. Contact the Law Office of William W. Waldner to speak with an experienced bankruptcy lawyer.