Overview of Chapter 13 Bankruptcy
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Debt can be a significant source of stress and burden, as a curse in many people’s lives. With their high-interest rates, creditors often want to keep individuals in debt indefinitely. However, freeing oneself from this financial burden can have numerous positive outcomes. Not only can it alleviate stress, but it can also allow individuals to become better parents, spouses, professionals, and friends. It opens up possibilities to pursue previously unattainable dreams and ideas. At our firm, we don’t judge how our clients accumulate their debt. Instead, we focus on educating them about their legal options so they can move forward and create a brighter future for themselves and their loved ones.
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What is Chapter 7 Bankruptcy?
It allows the discharge of qualifying debts under the Bankruptcy Means Test, such as credit cards and medical bills. However, certain debts like taxes and student loans may not be discharged. Consult a Bankruptcy Attorney to determine eligibility for discharge.
In Texas, our robust exemption laws protect clients, allowing them to retain their property, such as their home, cars, retirement accounts, and tax refunds, when filing for bankruptcy. By filing Chapter 7, clients can eliminate unsecured debt without repayment, halt creditor collection efforts, discharge judgments, keep their property (in most cases), and rebuild their credit score post-Bankruptcy Discharge. Texas, we have very strong exemption laws which allow most clients to keep all their property including, cars, retirement accounts, and even tax refunds.
WHO SHOULD FILE CHAPTER 7?
If you have credit card debt and other unsecured bills you can’t pay, consider filing for Chapter 7. It eliminates debt and rebuilds your credit quickly. You may still qualify even if you make over $100k. Our office can determine your eligibility. File Chapter 7 in Collin County, TX, Eliminate debt, halt collections, discharge judgment, keep property, rebuild credit.
Collin County Cities & Towns: Allen / Anna / Blue Ridge / Carrollton / Celina / Copeville / Dallas / Fairview / Farmersville / Frisco / Garland / Josephine / Lavon / Lowry Crossing / Lucas / McKinney / Melissa / Murphy / Nevada / New Hope / Parker / Plano / Princeton / Prosper / Richardson / Royse City / Sachse / Saint Paul / Van Alstyne / Weston / Wylie
We provide expert guidance to safeguard clients throughout the bankruptcy process. We’ll assess your debts, assets, and income to advise on the most suitable bankruptcy option. Our role is to address your queries, offer solutions, and explore alternatives to bankruptcy if available.
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy, also known as “wage earner’s plan” or “rehab bankruptcy”, lets you create a 3 to 5-year repayment plan based on future earnings to pay off debts to creditors.
Chapter 13 is ideal for situations like:
– Stuck in a cycle of credit card payments
– Owing the IRS
– Trying to stop foreclosure
In the cycle of credit card payments, people use their paycheck to pay bills, including minimum credit card payments. They then have no money left and continue using the cards for everyday expenses. This leads to increasing credit card balances and interest. Under Chapter 13, in Collin County, TX, you can pay what you can afford without worrying about interest and get back to a cash-based system for your bills.
If you owe the IRS, bankruptcy can discharge some debt but not all. The debt that can’t be discharged, called priority debt, must be paid back in a Chapter 13 filing. It’s often cheaper to include this debt in a Chapter 13 plan, as you don’t have to pay interest and penalties.
A Chapter 13 filing also automatically stops foreclosure. You can then create a plan that considers mortgage arrears, rolling them into a payment over 36 to 60 months.
STOP REPOSSESSION, LOWER CAR PAYMENT
Chapter 13 stops repossession with automatic stay. The car cannot be sold for ten days after repossession in Texas. File before 10 days for a chance to get the car back and include it in the Bankruptcy Plan.
Chapter 13 reduces car payments by:
– Lowering interest rate
– Paying the current car value instead of the owed amount (cram down) if the car is over 2.5 years old.
Hiring the right attorney is crucial in Chapter 13 bankruptcy cases.
Chapter 13 cases in Collin County, TX, can be more complex and easier to mishandle. There are various factors to consider, such as negotiating with the trustee on payment plans and addressing creditor concerns regarding interest rates, asset protection, and claim values. At Veronica Deaver, we often encounter cases from other attorneys who compromise with creditors and trustees instead of fighting for their clients’ best interests.
Overview of Chapter 13 Bankruptcy: A Brief Guide
Chapter 13, in Collin County, TX, also known as a reorganization plan, requires the submission of a viable plan to the Court and creditors for approval by the Judge.
Chapter 13 is ideal for those with arrears on secured items, outstanding IRS debts, or who exceed the income limit for Chapter 7.
To gain confirmation, the plan must be feasible, pass the disposable income test, and satisfy the best interest test.
Compared to Chapter 7, Chapter 13 offers more flexibility with attorney fees and mitigates the potential risks associated with a Chapter 7 filing.
Chapter 13 remains popular, accounting for 25% of all Bankruptcy cases.
Debtors must submit a plan to the Court and creditors, which should be between 36 to 60 months in length. Most choose a 60-month plan for maximum payment flexibility. This plan clarifies how different types of debt, such as secured, priority, and unsecured, will be treated. Secured debt requires regular post-petition payments and a provision for any arrears, or full payment in the plan. Priority debt, like tax payments, must be paid through the plan. Unsecured debt is treated as one class and the plan outlines if any will be paid in full.
Practical Point: In cases where secured debt is an issue, there is usually no need to pay unsecured creditors. This is because if the debtor is struggling to pay their secured debt, they likely cannot afford to pay unsecured creditors as well. Likewise, if there is no need to reorganize secured debt, it is likely that the debtor can afford to pay something back to unsecured creditors. These scenarios affect the tests for confirmation discussed below.
To have your plan confirmed by the Court, it must pass three tests: feasibility, disposable income, and best interest.
Feasibility – This test assesses your ability to make the Chapter 13 plan payment. You must provide a budget that demonstrates your ability to make the payment. The Court does not want to confirm plans that are unlikely to succeed, especially for debtors behind on mortgage or car payments. If the situation hasn’t changed or the plan doesn’t save money, it is likely not feasible.
Disposable Income Test – The disposable income test is the key factor in most Chapter 13 cases, similar to the means test in Chapter 7. It evaluates your income and expenses. Starting with household income, eligible expenses are deducted to determine if there is any remaining income.
Note that some expenses are set by the Court, such as food, clothing, personal care, healthcare, and transportation. These expenses are based on IRS standards for your location and household size.
Other expenses will vary by individual (car payment, mortgage payment, tax liability, health insurance deduction, flexible spending deduction, child support, child care, etc).
The test aims for you to adhere to a court-ordered budget, with any remaining savings allocated to the Chapter 13 plan. This budget is followed for 5 years, after which any remaining unsecured debt is discharged.
A Practical Note
The disposable income test is similar to the Chapter 7 “Means Test,” but with one key difference. It allows for consideration of 401k deductions. Therefore, it is advisable for debtors to set up their 401k before filing, as 5 years’ worth of contributions can be more advantageous than a higher Chapter 13 plan payment.
The Best Interest Test ensures that Chapter 13 serves the creditors’ best interests. It compares the distribution to unsecured creditors in a Chapter 13 plan to what they would have received in a Chapter 7 liquidation. The Chapter 13 plan must provide equal or greater distribution to unsecured creditors. For instance, if a debtor has a non-exempt boat worth $10,000, their Chapter 13 plan must allocate at least that amount to unsecured creditors.
Note: In Chapter 13, the debtor keeps all their assets but must adhere to the Best Interest Test. This allows individuals to avoid potentially losing assets to a Chapter 7 trustee and maintain a cushion in their bank account. For example, a debtor could keep $10,000 in non-exempt funds in their bank account if they commit to allocating at least that amount in their Chapter 13 plan. This could equate to as little as $167 per month over a 60-month plan. This flexibility is a key aspect of Chapter 13.
The flexibility of Chapter 13 is evident in various aspects
Some key examples of this flexibility include:
1. Attorney fees: In Chapter 13, the majority of attorney fees are paid through the repayment plan. This means that the attorney can be paid even at the expense of the unsecured creditors. In other words, your plan payment would remain unchanged even if the attorney did not receive any money. This is crucial because Chapter 13 cases typically involve higher costs due to their complexity.
2. Protection against a 727 action: A 727 action is a legal procedure initiated by a creditor or the US Trustee to prevent the discharge of debt. However, in Chapter 13 cases, such actions cannot be brought. (Please note that 727 actions are rare even in Chapter 7 cases.)
3. Variable payment terms: The disposable income test determines a monthly payment amount, which is then spread over a 60-month period to repay unsecured creditors. However, you are not bound to strictly follow the monthly payment amount. For instance, we often lower the plan payment for the first few months to allow the debtor to get back on their feet. Additionally, we can adjust the payment amount to increase later on when certain obligations, like a car loan, are paid off.
4. Focus on income rather than assets: The Chapter 13 trustee primarily considers your income, rather than your assets. As a result, Chapter 13 can be seen as a way to gradually repurchase non-exempt assets from the trustee over an extended period of time (as determined by the Best Interest Test mentioned earlier). In many cases, the Best Interest Test may not even come into play as the Disposable Income Test demonstrates a higher repayment amount to unsecured creditors.
Conversion or Dismissal – because the plan is voluntary you can dismiss your case or convert your case to a Chapter 7 (if eligible for conversion based on income).