In a Ch. 13, you are set up on a monthly payment plan which allows you to spread your arrears incurred on your mortgage or other secured loan over 36-60 months. Your payment plan is comprised of your regular monthly mortgage and/or car payments with a little extra to pay any arrears and a small percentage (as low as 1on your credit cards/loans, etc. Similar to a Ch. 7, at the end of the plan term your remaining unsecured debts (i.e. credit cards) will be eliminated. Unlike a Ch. 7, the Debtor must complete the payments into the Ch. 13 Plan in order to receive a discharge. Perhaps the greatest benefit to filing a Ch. 13 is the potential to take advantage of the cramdown provision with regard to junior liens on real property or auto valuation. (Link to cramdown)
An individual is eligible for a Ch. 13 as long as their secured debts are less than $871,550 and their unsecured debts are less than $290,525. This type of bankruptcy is a great alternative to Chapter 7 when your income greatly exceeds your monthly expenses AND it has less of a negative effect on your overall credit rating.
Cramdown
The cramdown provision of the bankruptcy code is nicknamed for Debtors ability to cram down pre-existing liens to the true value of the property.
For example, say for instance that a Debtor owns a piece of property valued at $100,000.00. He has a first mortgage with a principal balance of $101,000.00, a home equity line of credit for $10,000.00, and a federal tax lien for $5,0000.00. Because the fair market value of his property is less than the amount owed on the first mortgage, he can actually cram the home equity loan and tax lien down, making them unsecured. The cramdown process is not automatic, you must discuss this potential option with a qualified attorney who will advise you of your eligibility.
Use of the cramdown provision is also beneficial with regard to auto loans. To find a true valuation of your vehicle, you would need to go to www.nada.com or www.kellybluebook.com. For example, a Debtor owns a vehicle that is valued at $8,000.00 at the time of the bankruptcy filing. However, due to his poor credit, he owes $15,000.00 on the auto loan at a 13nterest rate. If eligible for a cramdown, the Debtor may only have to pay on $8,000.00, with the other $7,000.00 becoming unsecured. A qualified attorney may also be able to reduce the interest rate from 13o as low as 8/FONT>
THE BANKRUPTCY PROCESS (CHAPTER 13)
In a typical Ch. 13 bankruptcy, the process is as follows:
1. Complete a credit counseling course from an approved agency. The pre-filing course must be taken within the 6 months prior to filing your bankruptcy petition. See here for a list of approved agencies in your area.
2. The first step actual step in the bankruptcy process is the filing of the bankruptcy petition. When a petition is filed, an automatic stay goes into effect, protecting the Debtor from harassment and their property from all types of collection activity by their creditors.
3. Next, the Debtor will attend the Meeting of Creditors. A typical Debtor will not appear in Court, or be seen in front of a judge. In both types of personal bankruptcy, the Debtor will appear at an informal proceeding, called the 341 Meeting of Creditors. This hearing, which is named after Section 341 of the Bankruptcy Code, is held 20-40 days after the petition is filed. The Debtor is required to attend this hearing and is questioned by the Bankruptcy Trustee and/or any creditors that choose to attend (at this meeting, usually an attorney representing your mortgage company or auto lender will appear). This proceeding is very short, lasting typically 5-10 minutes. This meeting is much less stressful than a Ch. 7 meeting and is an opportunity for the Trustee to determine if your income will be sufficient to provide for the Chapter 13 plan payments.
4. At the end of your plan term, and prior to receiving a discharge, you must complete your Pre-discharge credit counseling or money management course.
5. Upon full payment into the Chapter 13 Plan, you will be entitled to a discharge of your debt. A discharge is a permanent order directing the creditors to refrain from taking collection activity against the Debtor. This means that you have paid back all arrears towards your secured creditors and you have paid a certain percentage to unsecured creditors. Any amounts not paid out to unsecured creditors will be wiped out. It is important to remember that once you receive a discharge in a Ch. 13 bankruptcy, you must resume making regular monthly payments directly to your remaining secured creditors.