Living With a Chapter 13 Case, Part 1
Perhaps times have been hard. Maybe you were out of work for a time, or you are recently divorced, or suffered through an expensive medical issue. The bottom line is, you got behind in your payments and now you want to get your financial picture back in order. Maybe you're wondering whether it's time to consider a bankruptcy case. Most people choose between two kinds of bankruptcy, Chapter and Chapter 13. Chapter 7 is the quicker, easier and usually the cheaper.
Chapter 7 in a Nutshell
First, let's talk about what Chapter 13 is not. It's not a Chapter 7 case, or what you probably think of a a classic bankruptcy case. Often called straight bankruptcy, in Chapter 7 you're allowed to protect some of your property, but any nonexempt property goes to a bankruptcy trustee who sells it distributes the proceeds to your creditors. That process usually takes four to six months.
Chapter 13 in a Nutshell
One type of bankruptcy is called a Chapter 13 case. In a Chapter 13 case, you will make monthly payments to a trustee who will distribute those payments to your creditors. This payment plan will last from three to five years.
Why File Chapter 13?
There are many reasons to file a Chapter 13 case. Most people who file Chapter 13 either do it because they make too much money to qualify for a Chapter 7 straight bankruptcy, or because they need a Chapter 13 payment plan to bring current their past due payments owed on the mortgage, the car, child support or taxes.
Chapter 13 can be a lifesaver for individuals who are committed to making it a success. Chapter 13 cases, though, are not easy to live with. Some studies indicate that fewer than one third of the people who file cases ultimately complete them. But, knowing what to expect is one of the most important factors in setting yourself up for success.
Here are some of the realities of life in Chapter 13:
- Length of the Plan
Your Chapter 13 case will last for at least three long years, and may last as long as five years.
Three years is a long time. It may not seem long, but lots of things can happen. Job changes, new babies, medical issues, car repairs. Some flexibility can be built into payment plans and budgets to account for the unexpected, but it is difficult even for experienced bankruptcy attorneys and Chapter 13 trustees to account for everything that might happen.
Because Chapter 13 is a tight squeeze financially for many people, they find it hard to sustain their enthusiasm for it over that length of time. They may decide that keeping the house or the aging car is not worth the sacrifice necessary to maintain the payments.
You may not know for months after your case is filed if your proposed plan payments are acceptable to the Bankruptcy Court and the Chapter 13 Trustee. The trustee will verify your income and make sure your expenses are not too high. It takes several months for creditors to file claims and for all the players to review those claims. If you disagree with a claim, the bankruptcy judge may have to decide the dispute. This process can take several months to a year to complete.
- People Will Learn That You Filed Bankruptcy
Filing bankruptcy no longer carries the stigma that it once did. Many people - about 1 in 10 - have filed bankruptcy over the last 40 years. Think about that the next time you’re at a meeting, in church or ordering a latte at Starbucks, or any place people gather.
Despite the sheer numbers, people usually do not want to broadcast that they filed a bankruptcy case. Everyone respects that concern, but it is a fact that bankruptcy cases are public records. On the other hand, unless you have a reason to look at them, most people will never learn about your case.
There are exceptions, however. Many Chapter 13 trustees require that you make your payments through a payroll deduction. The trustee will send a form to your employer setting up that deduction. If you feel strongly that being on a wage deduction will make things difficult for you at work, you can file a motion asking the court to allow you to pay the trustee directly. Courts will not allow direct payment unless you can show that you would be in danger of losing your job, being demoted, losing a security clearance or suffering some other serious consequence.
Besides your employer, others may learn of your case because of the notices every bankruptcy court must send to creditors. If your creditors include family or friends, they will get the notice and know of your case. Likewise, the court will send notice of your bankruptcy case to any co-signers on any of your loans or accounts.
- While You're in Chapter 13, You Still Have to Pay Your Bills
In addition to your Chapter 13 payments, you will still have to keep current on your house or car payments (if they are not included in the Chapter 13 payment plan), child support and alimony, property taxes, insurance and other expenses that you may have had difficulty paying in the past. If you got behind on your debt payments because you were out of work or had a decline in income, it may be very difficult for you to begin making those house, car or child support payments again.
If you get behind on your house or car payments while you are in a Chapter 13 case, the lender can file a motion with the Court asking permission to foreclose the home mortgage or repossess the vehicle. This is called a Motion to Lift Stay or a Motion For Relief From Stay.
If you are behind on your child support or alimony payments when you reach the end of your payment plan, the court will not issue you a discharge.
And, that's not all, folks. For more things to think about before filing Chapter 13, visit: Living With a Chapter 13 Case, Part 2.