These are answers to some of the most frequent questions I hear from my Tucson and Mesa clients considering Chapter 13 bankruptcy. For a general overview of the Chapter 13 process, see our Chapter 13 Overview page.
1. When should I choose a Chapter 13 bankruptcy?
As with any bankruptcy, you should choose Chapter 13 if it will help resolve your debt problems. Chapter 13 is most beneficial in the following situations:
- You are behind on your mortgage payments and need time to catch up.
- You are behind on your car loan payments and need time to catch up.
- You want to eliminate the second mortgage or HELOC on your home.
- The loan balance on your car is significantly more than the car’s value—the loan balance can be reduced to the value of the car in Chapter 13 bankruptcy.
- The interest rate on your car loan is too high—it can be reduced in Chapter 13.
- The mortgage balance on your real estate (other than your home) is higher than the value of the real estate—the mortgage balance can be reduced in Chapter 13. The new lower balance will need to be refinanced at the conclusion of the bankruptcy.
- Your income is too high to qualify for Chapter 7 bankruptcy, and you have debt that you are not able to pay.
- You filed for Chapter 7 bankruptcy within the last 8 years, but have debt that you are not able to pay.
- You have debts that cannot be discharged in Chapter 7 but can be discharged in Chapter 13.
2. How is Chapter 13 bankruptcy different from Chapter 7 bankruptcy?
There are a few major differences. The biggest difference is that in Chapter 13, you have a payment plan, and you have to pay all of your disposable income into the bankruptcy for three to five years. The second difference is that in Chapter 13, you get to keep all your property, including non-exempt property that you could lose in Chapter 7 bankruptcy. The third difference is that there are certain types of debts that are not dischargeable in Chapter 7, but dischargeable in Chapter 13. The fourth difference is that Chapter 13 allows you to modify most secured debt, but Chapter 7 does not. The fifth difference is that you can file for Chapter 13 if you make too much money to file for Chapter 7.
3. How is Chapter 13 different from debt settlement or debt consolidation?
Debt settlement or debt consolidation are voluntary processes and require cooperation from the creditor. For example, if you want to settle a credit card debt, the credit card company will have to agree to a settlement, and will also have to agree to the amount. If the credit card company does not want to settle, or does not want to accept what you can offer, there is nothing you can do. Also, with most settlements, if you are able to negotiate a reduction of the amount owed, you will have to pay the settlement amount in a lump sum, or over 2-4 months.
Chapter 13 bankruptcy is different because your creditors’ approval is not required. As long as you comply with the requirements of the Bankruptcy Code, the creditors have to accept whatever they are being paid under plan. In most cases, this results in significant savings to you when compared with a debt settlement. In addition, Chapter 13 stretches the repayment period over at least 3 years. This means that you don’t have to make any lump sum payments or try to pay off your debt in a short period of time.
4. Who is eligible to file for Chapter 13 bankruptcy?
To qualify for Chapter 13 bankruptcy, your debts cannot be more than $394,725 in unsecured debt and $1,184,200 in secured debt (these numbers are current as of 2019, and get adjusted periodically). In addition, you cannot be a stockbroker or a commodity broker. Only people can file for Chapter 13 bankruptcy, business entities cannot. However, if you are married, you and your spouse can file together. The debt limits are the same for married couples as they are for a single person.
To file for Chapter 13, you must have regular income. Your income can be from any source, such as a regular job, self-employment, or operation of a business. Your income can also be from social security or other governmental assistance. The income does not have to be paid weekly, bi-weekly, or even monthly. However, it has to be sufficiently stable and regular to allow you to make the payments under your Chapter 13 plan.
These are the only requirements specific to Chapter 13. In addition, before you can file any type of bankruptcy, you must also complete a credit counseling course. Also, if you had previously filed for bankruptcy and that case was dismissed, you may be ineligible to file another bankruptcy for 180 days from the date of dismissal.
5. Can people file Chapter 13 bankruptcy jointly?
If you are married, you and your spouse can file for bankruptcy jointly. In all other cases, joint bankruptcy is not allowed. So, if you and your partner live together and share all expenses, you cannot file for bankruptcy jointly, unless you are officially married.
6. Will Chapter 13 affect my credit score?
Any bankruptcy will have an impact on your credit rating. How much of an impact it will have depends on what your credit rating was before bankruptcy. If your credit score was already low, bankruptcy will likely not impact it very much, if at all. Also, because bankruptcy will wipe out most or all of your debt, that debt will no longer be reported as outstanding on your credit report. This should make it easier to rebuild your credit after bankruptcy (Read How to Restore Your Credit After Bankruptcy in Arizona).
7. I already filed for Chapter 7 bankruptcy. Can I convert to Chapter 13?
Yes, you can convert a Chapter 7 bankruptcy to Chapter 13.
8. Can I file for Chapter 13 bankruptcy if I have a business?
You can file for Chapter 13 if you have a business. If your business is operated as a corporation or a limited liability company (or some other legal entity), then your business cannot file for Chapter 13. However, with most small businesses, the owners are personally liable for all of the business debt, so it is the owners that really need to file for bankruptcy.
9. What will happen to my business if I file Chapter 13?
You can continue operating your business while in Chapter 13 bankruptcy.
In some cases, if you have business debt and both you and the company are liable for the debt, it may also make sense to shut down the company and start a new company. This can avoid the need to file for bankruptcy for the company. However, this type of business restructuring has to be done very carefully and in a way that does not violate fraudulent transfer laws. Otherwise, the debts of the old company can be transferred to the new company.
10. Will I lose my property if I file Chapter 13?
No. One of the benefits of Chapter 13 bankruptcy is that you get to keep all your property, even non-exempt property. In return for being able to keep your property, you make monthly payments under your Chapter 13 plan. Keep in mind that if there’s a mortgage or loan on your property, you will still have to make payments on the loan or mortgage, but the amount you have to pay may be reduced.
11. Can I get rid of my mortgage in a Chapter 13 bankruptcy?
If you want to keep the house or property that secures the mortgage, then in most cases you cannot get rid of the mortgage. There is one exception. If you have a second mortgage or a home equity line of credit (HELOC), and the value of the property is less than the balance of the first mortgage, then you can “strip” the second mortgage or HELOC. Basically, this means that you make it unsecured, like a credit card. Depending on your income and expenses, you may have to pay a portion of the second mortgage/HELOC through your Chapter 13 plan. However, in many cases, you can end up paying very little on the second mortgage/HELOC, and the majority of the balance will be eliminated. Keep in mind that in order to get rid of a second mortgage this way, you will have to complete the Chapter 13 bankruptcy and get a discharge.
12. Can I modify my mortgage in a Chapter 13?
There are three ways to modify a mortgage in Chapter 13 bankruptcy. (1) You can modify a mortgage on a property that is not your home. (2) You can modify a second mortgage or HELOC on your home if the value of your home is less than the balance of the first mortgage—the second mortgage can be “stripped” and eliminated at the conclusion of the bankruptcy. (3) You can modify a mortgage on your home through the Mortgage Modification Mediation Program that is available in Arizona.
13. What debts can I discharge only in Chapter 13?
A unique feature of Chapter 13 is that it allows you to discharge debts that cannot be discharged in other types of bankruptcy. This is often called the Chapter 13 super-discharge. The following are the most common debts that can be discharged only in Chapter 13:
- Debts for willful and malicious injury to property.
- Fines and penalties payable to the government (for example, traffic tickets). Fines imposed as part of a criminal conviction are not discharged.
- Debt incurred to pay taxes.
- Debt incurred through a property settlement agreement in a divorce. Child support and alimony cannot be discharged.
- Debts from a prior Chapter 7 bankruptcy where you were denied discharge.
- Homeowner association or condominium fees that became due after you filed for bankruptcy. Keep in mind that if you want to keep the condo/house, you will normally want to continue paying the HOA fees.
- Retirement account loans.
14. When will my Chapter 13 payments start?
Your first payment will be due within 30 days after the bankruptcy is filed. However, your payments do not have to be the same every month, so we can make them lower for the first few months to give you time to adjust your financial affairs.
15. Will I have to go to court?
Most Chapter 13 debtors will only need to attend one meeting with the Chapter 13 trustee. This meeting usually takes place in a courthouse, usually in a conference room, but there is no judge at the meeting. In almost all cases, the debtor will never need to go to a court hearing or see the judge.
16. What if the court does not approve my Chapter 13 plan?
If the court does not approve your plan, your plan can be amended to correct any issues that caused the court to not approve it. However, normally, the court will approve the plan if the Chapter 13 trustee approves it. An experienced Chapter 13 lawyer will know how to work with the Chapter 13 trustee to obtain the trustee’s approval of the plan.
17. What if I am unable to make my Chapter 13 plan payments?
If you are unable to make your Chapter 13 payments, there are a couple options. Your Chapter 13 plan can be amended to modify your payment schedule. The payments can be lowered temporarily or paused altogether. To compensate for that, later payments will be increased. Alternatively if your plan is shorter than five years, the length of the plan can be increased to minimize the increase in monthly payments.
If you are unable to make payment due to a decrease in income, your case can be converted to Chapter 7.
18. Can I change my mind and dismiss a Chapter 13 case?
Yes, you can dismiss your Chapter 13 bankruptcy case at any time.
19. Why do I need a bankruptcy attorney to file Chapter 13?
Chapter 13 bankruptcy is very complex, and successfully navigating it without a lawyer is almost impossible. A Chapter 13 attorney will ensure that you comply with all legal requirements, and do not have your case dismissed on a technicality. In addition, a good Chapter 13 attorney will do the following: properly prepare all the required bankruptcy documents, prepare your bankruptcy plan, object to improper claims, resolve objections filed by creditors, and work with the Chapter 13 trustee to obtain approval of your plan without the need for you to go to court. By having a good Chapter 13 lawyer, you can maximize your chances that your bankruptcy will go smoothly, and that you will not pay more than what is required.
You may also be interested in these articles: 7 Mistakes to Avoid When Filing for Bankruptcy in Arizona