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Bankruptcy: Chapter 13; Wage earner advantages

Few people are immune to the financial pitfalls that have resulted from the recession. If you have a regular income, Chapter 13, which is frequently referred to as a wage earner, can be an effective way to help you save your home, car or business. Used by individuals as well as certain small businesses, a Chapter 13 can provide much-needed relief in difficult times.

Key players/ benefits

Trustee

In a Chapter 13, the trustee will be primarily responsible for evaluating the bankruptcy petition, receiving payments under the plan, and distributing the payments to creditors. Remember, the trustee also oversees the meeting of creditors and the confirmation hearing.

The Chapter 13 plan

Under a Chapter 13 plan, the debtor agrees to pay priority, secured and unsecured creditors at certain percentages approved by the court over a time period of between three to five years.

Stop home foreclosure

When attempting to stop foreclosure, Chapter 13 may be a viable option. While a Chapter 7 may provide a stay, the stay is only temporary and the secured creditor can ask the Bankruptcy Court to lift the stay. In addition to offering an automatic stay, Chapter 13 can offer options such as making arrangements to repay over a three- to five-year period without penalties. But you must remain current with future payments.

Lien stripping second mortgages

In addition to enduring the recession, many homeowners had to face the fact that the value of their real property was less than the mortgage. If a second mortgage or lien was on the property, the situation became even worse. Under a Chapter 13 filing, the homeowner may be entitled to "lien strip" the second mortgage. This means that the second mortgage is no longer secured by the value of the home and will be treated as unsecured debt. If the debt is treated as unsecured, then the debtor may only be required to pay a certain percentage and at the end of the bankruptcy the debt will be discharged.

Keep your car

Filing bankruptcy will start the automatic stay and stop creditors from repossessing your car or other property. A Chapter 7 Bankruptcy can stop repossession temporarily. The debtor will have to pay all arrears in full and up front to keep the car, or turn the vehicle in to the creditor. There are certain advantages that exist under Chapter 13 with a vehicle. If the vehicle was purchased more than 910 days prior to the bankruptcy filing, the debtor may be entitled to repay only the value of the vehicle instead of the amount that is truly owed.

Even if the vehicle has been repossessed, Chapter 13 may be a tool to get it back. Creditors will hold a repossessed vehicle for a certain length of time before sending it to auction or selling it again.

Chapter 13 eligibility

If the debtor has enough of a dependable source of income to pay basic living expenses plus the payments under the bankruptcy plan, the debtor may qualify for Chapter 13 bankruptcy. Basic living expenses include rent, food, utilities, insurance, clothing and transportation. After paying these expenses, if the debtor can afford, then Chapter 13 is a possibility. A regular source of income includes income from a job or unemployment just to name a few possibilities.

Meeting of creditors

Just like in a Chapter 7, under a Chapter 13 it will be necessary for the debtor to attend credit counseling as well as a brief hearing before the Trustee. This hearing is very professional, organized, and designed to verify under oath what is in the petition.

Confirmation hearing

The specifics of the bankruptcy plan are confirmed at this hearing.

Discharge

A "discharge" occurs under Chapter 13 when the debtor completes the plan. Discharge refers to releasing the debtor from repayment of certain debts. Bankruptcy does not wipe out all debts, only certain debts. No more calls or letters may be sent in an effort to collect from the debtor. Additionally, the discharge does not apply to any co-debtor or guarantor's liability.

Post-discharge debts

Certain debts are not discharged upon the completion of a Chapter 13. Those debts include: debts not listed on the schedules filed on the petition; most student loans, unless in the case of undue hardship; recent federal, state and local taxes; child support and alimony; government imposed restitution, fines and penalties; court fees; debts resulting from driving while intoxicated; and debts because of the debtor's fraud, willful and malicious acts, embezzlement, larceny or breach of fiduciary duty, and frequently debts from a divorce settlement agreement or court decree.

Chapter 13 to Chapter 7

In some instances it is not possible for the debtor to complete a Chapter 13 plan. Frequently the case is either dismissed or converted to Chapter 7.

NEXT WEEK: Chapter 11.

(Contact Carlee McCullough, Esq., at 5308 Cottonwood Road, Suite 1A, Memphis, TN 38118, or email her at This email address is being protected from spambots. You need JavaScript enabled to view it. .)