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Law Office of
Jeffrey B.Peltz, P.C.
26 Court Street, Ste. 503
Brooklyn, New York 11242
Telephone: (718) 625-0800

Chapter 13 Bankruptcy


 

   In contrast to a Chapter 7 Bankruptcy, in which you may eliminate most or all of your debts, a Chapter 13 Bankruptcy requires that you pay some or all of your debts over a period of up to five years. Accordingly, Chapter 13 Bankruptcy is typically looked to for relief only when Chapter 7 is not an option.

 

 The following are reasons to file a Chapter 13 Bankruptcy:

  1. You have too much income to file under Chapter 7.
  2. You have fallen behind in mortgage payments and want to keep your home.
  3. Your home is in foreclosure, and you want to keep it.
  4. You have a second mortgage on your residence that you want to eliminate while continuing to pay your first mortgage.
  5. You have property that you could not keep in a Chapter 7 Bankruptcy, and you want to keep it.
  6. You received a Chapter 7 discharge within the past eight years.
  7. You have debts that are not dischargeable in a Chapter 7 Bankruptcy, such as student loans and taxes,which you want to pay in a Chapter 13 payment plan.

   When you file a Chapter 13 Bankruptcy, an automatic stay is issued by the Bankruptcy Court, which will stop all collection and legal actions against you. If your house is in foreclosure,the stay will stop the foreclosure action and allow you the opportunity to pay the amount in arrearsaccording to a payment plan and to begin your payments. The Chapter 13 Bankruptcy must be filed prior to the sale of the home at foreclosure. If this is your second recent Chapter 13 Bankruptcy, you will receive an automatic stay for only 30 days. To extend the automatic stay requires obtaining permission from the bankruptcy judge assigned to your case. If this is your third recent Chapter 13 Bankruptcy filing, no automatic can be granted.

 

   If you do not qualify for Chapter 7 Bankruptcy, Chapter 13 is a good way to repay your unsecured debts, such as credit cards, since you get to repay them – interest free – over a period of 3 to 5 years. In addition, depending upon your circumstances, you may not have to repay the entire amount that you owe. In fact, you may have to pay only as little as 10% of those debts. Unlike Chapter 7 Bankruptcy, in a Chapter 13 Bankruptcy, there are no limits on what assets or property you are allowed to keep.

 

   In a Chapter 13 Bankruptcy, a payment plan is established to permit you to make payments over a period of time, which can be from 3 to 5 years depending upon your circumstances. To qualify for a Chapter 13 Bankruptcy, you must have enough income to pay your living expenses and payments required under the plan. In addition, the amount of debts that can be processed in a Chapter 13 Bankruptcy is limited. Currently, the total amount of unsecured debts, such as credit card debts and personal loans, may not exceed $383,175, and the total amount of secured debts, such as mortgages and auto loans, may not exceed $1,149,525. These amounts are periodically increased. If your debts exceed these amounts, you are not eligible for Chapter 13 Bankruptcy and must consider Chapter 11 Bankruptcy.

 

   In a Chapter 13 Bankruptcy, your creditors must fair no worse than they would have if you had filed a Chapter 7 Bankruptcy. For example, in a Chapter 7 Bankruptcy, you are allowed to keep your home only if you have no more than $150,000 in equity. If you filed a Chapter 7 Bankruptcy and owned a home with $250,000 in equity, the trustee would sell the house and have up to $100,000 to pay your unsecured creditors. As a result, if you instead file a Chapter 13 Bankruptcy under the same circumstances, you must pay $100,000 to your unsecured creditors in a payment plan. Consequently, if the total amount of your unsecured debts is less than $100,000 in this example, your creditors will be paid in full. However, if you owe $200,000 in unsecured debts, your creditors will be paid only half of the money you owe them. Once the final payment is made under the plan, the remaining debt will be discharged, which means that you will not have to pay it.

 

   This example has been simplified to provide an idea of how Chapter 13 Bankruptcy works. Other factors must be considered. If, for example, your house were to be sold by the trustee, there would be expenses associated with the sale.Accordingly, if you are only slightly over your allowed exemption, you may still be able to file a Chapter 7 Bankruptcy.

 

   If you need to file Chapter 13 Bankruptcy because your income is too high to qualify for a Chapter 7 Bankruptcy, the amount that you will be required to pay to creditors in a Chapter 13 payment plan will be based upon the amount that your income exceeds the limit imposed to qualify for a Chapter 7 Bankruptcy. For example, if your income exceeds the Chapter 7 income limit by $10,000 per year, in a Chapter 13 Bankruptcy,you would be required to pay the first $50,000 of your unsecured debts. The amount required to be repaid in a Chapter 13 payment plan is determined by multiplying by five the annual amount by which your income exceeds Chapter 7 limit. In our example, the amount of $50,000 is determined by multiplying the $10,000 by which the Chapter 7 limit is exceeded by five ($10,000 x 5 = $50,000). You are required to multiply by five in this example, because you would be required to make payments for five years. Accordingly, if you have $50,000 of excess income over a five year period to qualify for a Chapter 7 Bankruptcy, and you have $100,000 in unsecured debts, you would be required to repay $50,000 of your unsecured debts over a five year period in a Chapter 13 Bankruptcy. The remaining $50,000 would be discharged in bankruptcy.

 

   Although Chapter 13 Bankruptcy payment plans can be short as 3 years, payment plans less than 5 years are only used when 100% of the debts are being paid.

 

   A unique aspect of Chapter 13 is that, if you have a second mortgage on your primary residence that is totally unsecured, which occurs if the value of the home is less than the amount owed on the first mortgage, you may be able to “strip” off the second mortgage (often a home equity loan) and turn it into an unsecured debt. The debt would then be paid in the payment plan along with your other unsecured debts.For example, if you are required to repay only 10% of the total amount of your unsecured debts, you would need to pay only 10% of your second mortgage in the Chapter 13 payment plan.

 

Procedure & Cost

 

     During our free consultation, we will review your situation and advise you of your options and of our fees. Our fee for a Chapter 13 Bankruptcy is usually between $3,500 and $7,500. The exact amount will depend upon the following factors: whether you have previously filed for a Chapter 13 Bankruptcy; how much you owe; the types of debts; the type of property you have; whether you are self-employed; and whether you are filing with your spouse. In addition to our legal fee, you must pay $310 for the court filing fee and $38 for a credit report (combined from all three major credit reporting agencies), and $30 for the two required classes discussed below. During our free consultation, we will tell you exactly what the Chapter 13 Bankruptcy will cost.

 

    If you wish to retain our office with regard to a Chapter 13 Bankruptcy, you must sign a retainer agreement and pay a deposit, also known as a retainer fee, of $500. We will provide you with written instructions regarding the information and documents that you will be required to provide. Once you have retained our law office, you may tell your creditors that they must call us and not you.After your first payment, you must pay us at least $500 per month until the balance of our fee is paid in full.

 

   When you have paid our fee in full, you must complete the first required class, which is called Debtor Counseling and which may be taken in person, over the telephone or on the Internet. Once you have completed that class, we will prepare your petition and file it with the Court. The moment that we file your bankruptcy petition with the Court, an automatic stay will be issued that will stop your creditors from taking any collection and legal actions against you. As a result, if your house is being foreclosed, your wages are being garnished, or your bank accounts have been frozen, the creditors must stop all such actions. If any money is taken from you after we file your petition, the money must be returned to you. Once we file your petition, you must begin making your payments under the proposed Chapter 13 payment plan.

 

   Once your petition is filed, you must take your second required class, which is called Personal Financial Management. You must complete this class before the completion of your Chapter 13 plan.

 

   The Meeting of Creditors will take place about one month after the filing of the petition. The meeting is known as a 341 hearing, because the hearing is called for under section 341 of the Bankruptcy Code.This hearing, during which you will be questioned by the bankruptcy trustee,has three basic purposes. The first purpose is to determine whether you have committed fraud. The second is to determine what assets you have. The third purpose is to determine whether your Chapter 13 payment plan is realistic,which involves mostly whether you can afford to make the payments. Typically, the hearing will last approximately 15 minutes.

 

   We will prepare you for the questions that will be asked and will be at your side during the hearing. If the bankruptcy trustee is satisfied and has no further questions, he or she will “close” the meeting. However, if the bankruptcy trustee has further questions, a second hearing will be scheduled to occur approximately two weeks later. We will accompany you to that hearing as well.

 

   After the Meeting of Creditors, the Confirmation Hearing will be held, at which, if the bankruptcy trustee and the bankruptcy judge are satisfied with your proposed payment plan, it will be approved. You will continue to make your monthly payments to the bankruptcy trustee. Once you have completed all of your payments under the plan, you will receive a discharge. The discharge, along with your bankruptcy petition, will be proof that you are no longer responsible for your discharged debts. You should hold on to those documents for at least the next 10 years.