Chapter 13 Bankruptcy
How does a Chapter 13 bankruptcy work?
A Chapter 13 - Bankruptcy is like a payment plan. You pay your disposable income to your creditors and after a period of 3 or 5 years, your creditors are "eliminated" or discharged. Similar to a Chapter 7 bankruptcy, certain creditors, such as student loans, are not discharged.
"Disposable income" is income less amounts reasonably necessary for the maintenance or support of the debtor or dependents.
Sometimes this can take some steps to get an acceptable Plan confirmed by the bankruptcy court. A Chapter 13 bankruptcy is a useful tool for protecting your nonexempt assets in bankruptcy and is a valuable tool for saving a home from a foreclosure sale.
Example of a Chapter 13 Plan
A simple Chapter 13 bankruptcy plan example with these facts:
Foreclosure sale is scheduled and this case is filed at 8:58 a.m. on the foreclosure sale date for a sale scheduled for 9:00 a.m. of the same day.
Your mortgage is $1400.00 per month
Total mortgage late amounts $14,0000 (10-months)
Car payment is $ 350 /month
Car Insurance $100 / month
Total Credit card debt is $10,000
Monthly food is $600.00
All other expenses are $650
Monthly credit card minimum: $265
Gross Monthly income: 4,000.00
After taxes and insurance: 3,450.00
In this example your monthly payment for 5-years would be $344.50 for 60 months. The result is your foreclosure sale is not valid since you filed before the actual sale. Your $14,000 in mortgage lates are paid in full with no interest charged. Your credit cards are paid $1000.00* and the rest of the unpaid amount was "wiped out" and now you will owe 0.00. You also paid a total of $5670 in court, attorney and trustee fees as part of the bankruptcy payment and those were paid in full as part of your monthly payment. To start this, your paid $310.00 as a filing fee.
In this example, the $344.50 payment is made to the bankruptcy trustee assigned to you and your normal mortgage payment and car loan payment is paid directly to them on a monthly basis. All your other expenses function as they normally would with the exception of your credit cards (in this case $265) which you no longer have to pay because they are part of the bankruptcy.
*Credit cards are an unsecured creditor and they must be paid at least %10 in a Chapter 13 bankruptcy
To further detail this Chapter 13 example, the breakout would be:
Total debt in bankruptcy $20,6570
It consists of:
$14,000 in mortgage arrears
$5,670 attorney fees, court trustee fees for the entire 5-years
$1,000 of your unsecured debt (10% the rest is wiped out)
The sample monthly expenses are: $3,100.00
It consists of monthly mortgage $1400
Your car payment: $350
Car insurance: $100
Monthly Food: $600
All other expenses: $650
No credit card payment!
Your Monthly Available for payment is $350.00
Which is your (monthly expenses) less your after deductions Net Income of $3450.