When You Must File a Chapter 13 Bankruptcy in Phoenix
Chapter 13 bankruptcy results in a discharge of your unsecured debt just like a Chapter 7. The difference is that in Chapter 13, monthly payments are made for a three to five year period through the bankruptcy court. Generally, this means paying little and sometimes nothing to your unsecured creditors, just like a chapter 7, while paying off some secured loans in part or in full.
Chapter 13 is the better option in at least three different situations.
Too Much Equity
When you file for Chapter 7 bankruptcy, a certain amount of your property can be protected without the threat of it being sold off. If you have more equity than can be protected, the Chapter 7 Trustee can sell the item off. For example, in Arizona, the homestead exemption can be used to protect up to $150,000 in home equity, but if you have more equity than that, the chapter 7 bankruptcy trustee may pursue selling the property off.
In Chapter 13, there is no risk of sale. Let’s say the issue is your house. You may be able to keep the unprotected equity as long as you agree with the amount of the unprotected equity through your plan to pay something to your unsecured creditors.
So if you had $170,000 in equity and you owed $100,000 to your unsecured creditors, you might have to pay $20,000 to your creditors over three to five years in order to keep the house. So you end up eliminating $100,000 by paying $20,000. Often this can be accomplished by making small payments and then a lump sum payment three to five years later.
Too Much Income
Let’s say you are preparing to file Chapter 7 bankruptcy, but when your net income minus your expenses are reviewed it shows that you can afford to make payments. The sad fact is that If you are able to make payments, you might be required to file Chapter 13 instead of Chapter 7 and pay what you can afford to pay on a monthly basis into a Chapter 13 Plan.
The starting point for review is through a complex calculation called The Means Test. This is best administered by an experienced bankruptcy attorney, particularly if your income is too high. Only an experienced bankruptcy attorney will be able to properly identify the allowable expenses that might still enable you to qualify for Chapter 7 or might limit the amount of your monthly plan payment.
When you are behind on a mortgage, taxes or a car loan debt and you need time to catch up, or your payments or maybe your interest rates are just too high, Chapter 13 lets you spread out payments over the plan period of 36-60 months instead of a lump sum or shorter payment period.
Mortgage and tax arrears can normally be paid back interest-free over three to five years without risk of further default or foreclosure. Similarly, car loan interest rates are normally substantially reduced and under some circumstances, the principal owing can be lowered as well.
What makes a Chapter 13 plan payment on these debts a winner is that your other debts for unsecured loans like credit cards and medical bills can be substantially reduced or just eliminated for many people, freeing up money on the stuff that you actually want to pay off.
Please let me know if you have any questions about the advantages of Chapter 13 Bankruptcy or are just worried about not qualifying for Chapter 7. At Phoenix Fresh Start Bankruptcy are practice is pretty evenly split between the two. We are happy to help.