Personal Bankruptcy: Chapter 13 Reorganization

Chapter 13 bankruptcy is known as personal reorganization.  In Chapter 13, a person pays off a portion of her debts on a three to five year payment plan.  However, unlike Chapter 7, debtors get to keep property which is non-exempt.  Debtors must have sufficient income to pay their living expenses and keep up with their payments under their plan; for this reason Chapter 13 is sometimes called “wage earner’s bankruptcy.”

The biggest advantage to Chapter 13 bankruptcy is that it allows people to keep property which is not protected in Chapter 7.  Chapter 13 bankruptcy has these additional advantages.

• It stops the foreclosure process.
• It saves your home from foreclosure.
• If you want to surrender your house, the mortgage will be treated like any other unsecured debt and paid off in reduced monthly payments over three to five years.  In other words, you will pay a fraction of the total costs, and pay for a much shorter time.
• It allows you to make up missed mortgage payments over time.
• It saves non-exempt property from seizure.
• It stops sheriff’s sales.
• It stops collection and harassment by creditors.
• It stops repossessions.
• It prevents utilities from shutting off service.
• It allows you to obtain bankruptcy protection from your creditors even if you don’t qualify for Chapter 7.
• It allows you to “strip off” and “cram down” some second mortgages.
• Unlike Chapter 7, in Chapter 13 if you want to make some repayment, but don’t have the financial ability to pay creditors in full, you can.
• Creditors cannot go after co-debtors provided you make payments under the  plan.
• The waiting period after a prior bankruptcy is shorter than that for filing Chapter 7.

You should first sit down with an experienced bankruptcy attorney to review your financial situation and determine whether Chapter 13 is right for you.  If so, your attorney will prepare a bankruptcy petition.  This lists all your assets and liabilities, income and expenses.  Everything in the petition needs to be documented (our bankruptcy attorneys will give you a list of what you need).  You will also need to take a credit counseling course not more than forty-five days after filing the petition, although we recommend you do so beforehand.

Once your bankruptcy petition is filed, the court imposes an “automatic stay.”  This means that your creditors must immediately stop harassing you – no more phone calls, suits or wage garnishments; the foreclosure process stops.  You must also file a Chapter 13 plan with your proposal on how you will repay a portion of your debts over three to five years.  You will need to immediately begin making monthly payments under your proposed plan.

The court appoints a New Jersey bankruptcy trustee. There will be two meetings with the trustee.  The first is a meeting of creditors where you will meet with the trustee, often for no more than five minutes, to answer some general questions about your financial situation.  The second meeting is a confirmation hearing to review and approve your plan.  

After the plan is approved, you will make the reduced payments called for by the plan to the trustee, who will distribute them to your creditors.  After you have successfully completed the plan, your debts will be discharged, even though you will probably have paid far less than what you originally owed.

Unlike Chapter 7 liquidation, Chapter 13 doesn’t eliminate all your debts.  You must repay a portion of your debts over the course of the three to five year plan.  However, this is usually a fraction of your total debts, and repayment is offset by the fact that you can keep homes and cars even if you have significant equity in them.

Chapter 13 discharges are complex. While many debts are discharged, some are not; for instance, if you keep your home, your credit card will be discharged, but your mortgage will not.  Creditors paid off under the plan, even if they are paid just a small fraction of what was owed, cannot pursue further payment. Just like in Chapter 7, some debts cannot be discharged, including student loans, debts incurred by fraud, child support, damages for personal injury or death caused by drunk driving, debts not listed on your bankruptcy petition and damages for assault.

In some cases you can get a Chapter 13 hardship discharge even if you couldn’t make all the plan payments if the failure was due to circumstances beyond your control, your creditors received at least as much as they would have if you had filed Chapter 7, and it is impossible to modify the plan.  A good example of a “hardship” is illness or injury which prevents you from working.

Some people can’t file Chapter 13.  For instance, if an individual has more than the debt limits of Chapter 13 (more than $360,475 in unsecured debts, and $1,081,400 for in secured debts), they cannot file.  However even in this case Chapter 11 is an option.

McLaughlin & Nardi, LLC’s lawyers Can Help our New Jersey bankruptcy attorneys have considerable experienced helping people struggling with debt.  We can help you get debt under control and begin a solid financial future. Please call one of our experienced bankruptcy attorneys at  (973) 890-0004 or e-mail us to obtain assistance.