You work hard to provide for yourself and your family, but sometimes that paycheck just isn’t big enough to make ends meet. If you’re struggling with debt but have a steady income, Chapter 13 bankruptcy might be the solution to your debt troubles. Bankruptcy is no one’s first choice, but it may be a better option than waiting for the bank to foreclose on your home or repossess your car.
How Chapter 13 Bankruptcy Works
When you decide to file for bankruptcy under Chapter 13, you (and your bankruptcy attorney) will gather up all of your financial information and take it to the court. You’ll have to report all of your income and all of your debts. You’ll work with a bankruptcy trustee, the court, and your creditors to create a payment plan. You’ll receive an allowance for living expenses and for payments of your secured debt – generally your home mortgage and your auto loan. You’ll pay the remainder every month to the bankruptcy trustee, who will distribute it among your unsecured creditors (credit card companies, medical creditors, etc.).
If you’ll still have to make these monthly payments, then why file for Chapter 13? For one, you won’t be asked to pay more than you make. Your payments depend on your income, not on the amount of your debt. You won’t fall deeper into debt while you’re making your Chapter 13 payments. Chapter 13 bankruptcy also comes with the protection of the automatic stay. The automatic stay prevents creditors from moving against you for collection – no lawsuits, repossessions, bank levies, wage garnishment, or foreclosures. If they’ve already started a collection action, they have to stop it when you file for bankruptcy. Finally, you only have to make payments for a set amount of time. At the end of your payment plan, your remaining unsecured debt will be forgiven. You’ll end up paying pennies on the dollar for your debt.
How long will my plan be?
The length of your Chapter 13 plan depends on your monthly income and how much time you’ll need to make your payments. First, look at your monthly income. If it’s below the state median, your plan will last for three years. If it’s above the median, your plan will last for five years. In New Jersey, the median income is almost $60,000.
You may opt for a five-year plan even if you qualify for a three-year one. First, in order to keep your major assets (usually your home and your car), you have to cure your arrearages on the debt through your plan payments. That means you have to make up all of your missed payments. Otherwise, you’ll finish the bankruptcy process and walk straight into foreclosure. Sometimes, debtors owe too much to make up all of their missed payments in just three years, so they opt for a five-year plan. Over the course of five years, you’ll probably be able to completely pay off your auto loan and make up all of your arrearages on your mortgage loan.
Secondly, you may choose to lengthen your bankruptcy process to protect your nonexempt assets. If you can’t work out a payment plan with court approval, your case can be converted to Chapter 7. In Chapter 7, your nonexempt assets are liquidated and the proceeds are distributed to creditors. When you file under Chapter 7, you can choose between state and federal exemption schemes. New Jersey offers little protection through exemptions, so almost all of your property is subject to Chapter 7 liquidation unless you opt for federal exemptions. If you have important assets that you want to keep through your bankruptcy, you want to avoid Chapter 7.
In order for the court to approve your Chapter 13 plan, you have to meet the “best interests of creditors” test. To pass this test, your Chapter 13 plan must pay at least as much to your unsecured creditors as they would have gotten if you filed under Chapter 7. Most debtors have little or nothing by way of nonexempt assets, so unsecured creditors would receive nothing. However, if you have enough assets to make a significant payment to unsecured creditors in Chapter 7, you may have to choose a longer Chapter 13 plan to get court approval and protect your assets.
The Bottom Line
Chapter 13 bankruptcy is a complex process, but a successful bankruptcy will give you a fresh financial start. If you’re struggling with debt, reach out to one of our experienced bankruptcy attorneys to discuss your goals and options.