Chapter 13

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Not everybody has a willy-nilly choice between chapter 7 and Chapter 13 – it supposed to be a function of your budget. If you can’t afford to pay your creditors, you should file chapter 7, and if you can, you should file chapter 13. Some people are in that middle range where they do have the choice. In general, as between the two I generally steer people into a chapter 7 unless that is either impossible due to high income, too costly due to nonexempt assets, and/or there are other compelling reasons to file a chapter 13. Even in a chapter 13, a debtor can often still wipe out the vast majority of their unsecured debt, for instance if there plan is basically mostly paying off mortgage arrears.

People usually file Chapter 13 when they have mortgage arrears, taxes, back child support, a prior case filed within the last eight years, or excess income which does not allow them to file for Chapter 7. In a Chapter 13, you make monthly payments to a trustee.

One of the coolest things we can do in a 13 but not in a 7, is “stripping” unsecured junior mortgages. If your house is worth less than the amount owed on the first mortgage, we should consider a lien strip in a 13, which will not only mean you don’t need to pay the second mortgage, but will also get it removed from the property records. I am one of Minnesota’s leaders in lien stripping, having been one of the first to do it, I’ve probably filed more than anybody else, and I also prevailed on a case at the 8th Circuit Court of Appeals that resolved any doubt as to the feasibility of lien stripping.

For above median income debtors, the means test form still needs to be filled out, but it doesn’t really mean very much. The case law simply states that the means test is a starting point for determining a person’s disposable income in chapter 13. Their actual disposable income for determining their plan payment is based on current/projected income, less actual projected living expenses. An above-median debtor needs to be in chapter 13 for 5 years, and a below-median debtor has the option of 3 to 5 years, and the plan can always be shorter if 100% of all creditors are paid off.

A couple of the things that I don’t like about chapter 13, is that you need to commit your disposable income into your plan for 3 to 5 years, and if your income goes up during that timeframe, your plan payments could go up. Also, while you are in chapter 13, if you were to inherit money, or were injured and settled personal injury claim, that would most likely need to be paid in to the plan. While a chapter 13 stays on your credit for 7 years, as opposed to 10 years for a chapter 7, the fact is that you shouldn’t plan on going back into debt until you are done with a 13, whereas in a 7, it’s a virtual non-issue on your credit after 3 years.

We help people consider their financial options, and when feasible, we help people file for relief under Chapter 7 and Chapter 13 of the Bankruptcy Code.

Check out Tim’s recent articles for helpful insights on Chapter 13 bankruptcy and how those may impact you.

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