Chapter 13 Bankruptcy Questions and Answers
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Q: What is a Chapter 13 Bankruptcy?
A: A "Chapter 13" is a type of bankruptcy case governed by sections 1301 through 1330 under Title 11 of the United States Code, hence its name. Chapter 13 cases require the filing of a "Plan" by the debtor, setting forth how the debtor proposes to treat various types and classes of creditors. (Back to Top)
Q: How long does a Chapter 13 case last?
A: Chapter 13 cases typically run either 36 or 60 months, depending on whether the debtor's income is above or below median for your location. However, debtors who would qualify for a 36-month plan have the option of extending the Plan up to 60 months if necessary to get the Plan confirmed. The term of the Plan begins to run from the date the first payment id due, which is 15 days from the filing date. For a plan that proposes to pay unsecured creditors 100% of allowed claims there is no minimum length of time that you need to be in the Plan. (Back to Top)
Q: What is a "confirmed" Chapter 13 Plan?
A: Chapter 13 cases are administered by a local Chapter 13 Trustee, who must confirm that your proposed Plan meets all legal requirements. Once confirmed, the provisions of the Plan control all relationships between the debtor and the debtor's creditors. (Back to Top)
Q: Why file a Chapter 13?
A: Some potential debtors are not eligible to file a Chapter 7, either because a prior Chapter 7 was filed within the past 8 years, or because the debtor received a discharge in a previous Chapter 13 within the past 4 years, or because the debtor's income is above median. However even if a potential debtor would otherwise be eligible to file a Chapter 7, there may be reasons to choose to file under Chapter 13. Common reasons include having a forum within which a debtor can address debts that cannot be discharged in a Chapter 7, including recent taxes, child support, student loans, and fines. (Back to Top)
Q: How are my monthly Chapter 13 Plan payments determined?
A: It depends on whether you are an above or below median income debtor. If you are a below-median income debtor, your monthly Plan payment is determined by the amount of disposable monthly income as reflected in your income (Schedule I) and expense (Schedule J) Schedules.
However, if you are an above-median income debtor, then your monthly plan payment is either the amount of your Disposable Monthly Income as calculated by the means test, or a lesser amount if by paying the lesser amount can pay 100% of allowed unsecured claims. (Back to Top)
Q: Am I required to use Social Security benefits to fund my Chapter 13 Plan..?
A: No. 42 U.S.C. §407 of the Social Security Act states:
(a) The right of any person to any future payment under this title shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this title shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law. (Back to Top)
Q: Can I use Chapter 13 to stop a foreclosure on my home?
A: Yes. Filing a Chapter 13 will stop a foreclosure and allow a debtor to propose to cure arrears on mortgage payments over time. However you must be able to maintain your current monthly mortgage payments as well as proposing to cure the arrears within the life of the Plan. (Back to Top)
Q: Can I use Chapter 13 to get rid of 2nd Mortgages and Home Equity Lines of Credit?
A: Yes, provided certain conditions are met. First, any such liens must be wholly unsecured, meaning that the value of the property is equal to or less than the amount owing on the first mortgage. Second, you must complete your Chapter 13 plan. Even though you may initially receive an order determining the 2nd mortgage or HELC to be wholly unsecured, if your case gets dismissed or converted to a Chapter 7 the lien will be reinstated. (Back to Top)
Q: Can I use Chapter 13 to reduce the interest rate on my mortgage?
A: No. You cannot force modification of the interest rate on a secured mortgage. (Back to Top)
Q: Can I use Chapter 13 to reduce the amount owing on a vehicle?
A: Yes, provided that you purchased the motor vehicle more than 910 days prior to filing. If so, you can reduce the amount owing to the fair market value of the vehicle. You can also force the creditor to accept a lower interest rate, generally down to just over 4%. This can often create substantial savings. (Back to Top)
Q: What if I purchased my vehicle within 910 days of filing?
A: You will not be able to reduce the amount owing on the vehicle, but may be able to reduce the monthly payments by spreading the remaining payments over the life of the Plan. You can also reduce the interest rate the same as you can for a vehicle purchased more than 910 days before filing.
But note that the 910 day rule only applies to original purchase money claims, not to refinances. And if the collateral was anything other than the vehicle that was purchased, the time frame is reduced to one year.
Also, the 910 day rule does not apply to “negative equity”. In a memorandum ruling issued November 17, 2011, Judge Lynch of the western district of Washington ruled that the secured claim of a purchase money lender should be reduced by the amount paid to a previous lienholder on a trade-in vehicle. The Court held that this “negative equity” was not part of the new lender’s purchase money security interest, and found the claim to be subject to bifurcation and cramdown under 11 U.S.C. §506(a). The Court further ruled that the amount of the negative equity had to be reduced by the amount of the down payment paid by the debtors. In re Siemers – Case #11-44935. (Back to Top)
Q: Do I have to pay interest on credit card debts and other unsecured claims?
A: Not unless you are required to pay 100% back to your creditors because of the amount of equity you have in various assets. You are required to pay your Chapter 13 unsecured creditors as much as they would receive in a Chapter 7 liquidation case. If the value of your non-exempt assets would require you to pay your unsecured creditors 100% of what is owed to them, you must pay interest on their claims. However, you are not required to pay the contract rate of interest. (Back to Top)
Q: Do I have to pay interest on student loans..?
A: Yes, interest on student loans will continue to accrue during the life of the Plan and any remaining balance of principal and interest will be due and owing upon discharge.
Q: What is a "co-debtor" stay?
A: Generally, the filing of a bankruptcy stays, or prohibits, any action to collect a debt from the debtor. In Chapter 13 cases, the co-debtor stay protects a non-filing spouse from any actions to collect on debts that are consumer related, such as credit card debts, vehicle loans and health care expenses. (Back to Top)
Q: Does the co-debtor stay apply to tax collections?
A: No. Taxes are not considered consumer debts, so filing a Chapter 13 will not protect a non-fling spouse from tax collection efforts. (Back to Top)
Q: Can I file a Chapter 13 if I am an employee in the marijuana business..?
A: No. The Chapter 13 Trustee in Tacoma will not confirm a Chapter 13 Plan if the debtors have any relationship to the marijuana business, even if that relationship is only being employed as a cook for a marijuana business that is authorized by the State of Washington. However, the 9th Circuit Bankruptcy Appellate Panel just issued a decision in February of 2018 that overturned the dismissal of a debtor's case, which the lower court had dismissed based on it's belief that the landlord debtor was receiving rental income from a marijuana dispensary. The decision is significant because it holds that a bankruptcy cannot be dismissed simply because of the mere presence of a marijuana business or related proceeds in the case. Back to Top)
Q: Is child support dischargeable in a Chapter 13..?
A: No. 11 U.S.C. §523(a)(5) specifically provides that a domestic support obligation, i.e., child support, is not dischargeable in a Chapter 7. And 11 U.S.C. §1328(a)(2) provides in part that a Chapter 13 discharge does not apply to debts of the type listed in 11 U.S.C. §523(a)(5). (Back to Top)