What You Need to Know About Chapter 13 Bankruptcy in Michigan
Chapter 13 bankruptcy is a “reorganization” bankruptcy rather than a complete liquidation of debt as in a Chapter 7. A Chapter 13 is, basically, a payment plan enforced by the Federal Bankruptcy Court upon all of your creditors, whether the debt is a “dischargeable” debt like a credit card or “non-dischargeable” debt like a child support arrearage or recent income taxes owed. Contrary to popular belief, you are not required to pay back 100% of what you owe to your creditors in a Chapter 13.
One of the best features of a Chapter 13 bankruptcy is that no negotiation with your creditors is required for court approval of a Chapter 13 Plan; it operates with the force of Federal law with no need to pay any interest at all on common, “unsecured” debts, such as credit card or medical debt. You repay only what you can afford to pay through the Chapter 13, and the unpaid balance owed to your common, “unsecured” creditors, such as credit card and medical debt, is totally discharged, just as in a Chapter 7 bankruptcy.
The Chapter 13 Process
The Chapter 13 Plan may be 36-60 months long, depending upon your household income. The Chapter 13 Plan is devised by you and your attorney and proposed to the court for approval. What you pay in a Chapter 13 Plan is whatever net income you have in your household each month, after basic household expenses, such as food and gas and utilities are taken into account. For instance, if you have $1500 in net household take-home pay each month and $1200 in household expenses, your Plan payment would be $300 every month in most cases.
The approval process for the Chapter 13 Plan is roughly 4-6 months long in most cases and will require you to attend, typically, at least two hearings at the Bankruptcy Court. Once the Plan is approved by the Bankruptcy Court, you are on Chapter 13 “auto-pilot,” your only obligations being a timely monthly payment and good communication with your attorney, should your income decrease or expenses increase at any time. No Trustee or any other party looks over your shoulder for the remainder of your Chapter 13 or monitors your household budget, contrary to popular misconception.
Chapter 13 is the form of bankruptcy available to you if you are not qualified to file a Chapter 7 bankruptcy. However, there are many good reasons to file a Chapter 13 even if you are qualified for Chapter 7.
Reasons to File Chapter 13 Bankruptcy
- Save Your Home from Foreclosure: If you are behind 60 or more days on your mortgage payments and are threatened with foreclosure, you can catch your deficient payments up over the 3-5-year Chapter 13 payment plan as a low monthly payment amount along with your regular mortgage payment in order to get yourself current again and stop the foreclosure. Note that a Chapter 13 Bankruptcy MUST be filed before a foreclosure sheriff’s sale auction of the property in order to accomplish this. Timing is essential when stopping a foreclosure with a Chapter 13!
- There is no liquidation of your personal assets in a Chapter 13. If you have property that would be seized and sold off in a Chapter 7, a Chapter 13 may be your best option if that property is important to you. For this same reason, if you are running a small business that you want to continue to run after the bankruptcy, a Chapter 13 bankruptcy may be a wiser option so that you do not risk losing your business in a Chapter 7, where the Trustee has the right, under certain circumstances, to seize and wind down your business.
- Strip Off & Discharge a 2nd Mortgage: In a Chapter 7 bankruptcy, you either keep or surrender your real estate as-is, with all mortgages intact. In a Chapter 13, we can pursue a mechanism called a “lien-strip,” which will remove and discharge your liability to make payments on a second mortgage or home equity line of credit, if your house is worth less in fair market value than you owe on a first mortgage.
- Cram-Down Your Secured Debt for a Rental Home or a Vehicle to the Fair-Market Value of the Property: We can also, under certain circumstances, cram down the payment you make for other secured debts, such as a car payment, so that you pay in full in the Chapter 13 plan only what the property security it as actually worth. If your car, for example, was purchased more than 3 years ago and has more than 75,000 miles on it, you will pay off your loan in a Chapter 13 only to the extent of the car’s real value, with the balance owed treated like a separate unsecured debt: paid in part, the balance totally discharged. You will come out of the Chapter 13 owning the property in full without any lien on the property.
- Pay Off Tax Debt, Child Support Arrearages, and Other Non-Dischargeable “Priority” Debts Over 3-5 Years at 0% Interest: Tax debts and other non-dischargeable debts, with the exception of student loans, can also be paid off through a Chapter 13 Plan at 0% interest—a few percent better than the IRS will give you in most of its repayment plans.
- Dismiss It or Convert it to a Chapter 7 at Any Time if It Stops Working for You: A Chapter 13 can also be dismissed at any time if it is no longer working for you, or it can be converted to a Chapter 7 later on, if your economic circumstances decline. Your Chapter 13 Plan can also be modified in many circumstances if your income decreases or expenses increase, altering the amount of “net income” available to pay into your Chapter 13 Plan. It is a highly flexible process.
- No Tax Consequences: Unlike “debt settlement” or “debt negotiation,” in which you negotiate a settlement amount on a total debt owed directly with a creditor, debts discharged through bankruptcy carry no taxable penalty. When you reach a settlement directly with a creditor outside of bankruptcy, they will “charge off” the “forgiven” balance, and you will in nearly every case receive a 1099 from that creditor for that amount that you will be required to pay taxes upon as though it were personal income earned in that year. There is no taxable consequence for debts discharged in bankruptcy.
A Chapter 13 Bankruptcy is a complicated process, and it is essential that you retain an experienced bankruptcy attorney to assist you with it.