There are two types of bankruptcy that individuals usually file. The one discussed on this page is Chapter 13; the other is Chapter 7 and is discussed here. Chapter 13 can help people in various situations. We think we provide the best combination of experience and cost-effectiveness among Chapter 13 bankruptcy attorneys in Massachusetts. You can read about our Chapter 13 fees here.
The big picture is pretty simple. Chapter 13 is a court-approved partial repayment of debts. This partial repayment happens through a plan, which lasts between three to five years. The length of your plan depends on your “applicable commitment period” which, in turn, depends on your income and family size. The amount of your plan payment also dictates your income and family size.
At the end of your plan payments, the remaining balances on most debts (like credit cards, medical bills, unsecured personal loans, unsecured junior mortgages, etc.) are discharged and any mortgages and taxes are up-to-date.
Why do People File Chapter 13?
The most common reason people file Chapter 13 is that they have to. They need debt relief and Chapter 13 is the only type of bankruptcy they qualify for. This is normally because of their income. The bankruptcy laws require that most people who can afford to pay back some debts do so. That makes some common sense. it’s what the bankruptcy means test is all about. Most, but not all, people who are above-median income must file Chapter 13 because of the bankruptcy means test.In Massachusetts, here’s the median income by family size (for cases filed after May 1, 2017):
- Family of one: $61,102
- Family of two: $76,414
- Family of three: $93,755
- Family of four: $113,651
- Add $8,400 for each additional family member.
However, many people who qualify for Chapter 7 end up filing Chapter 13. Some common reasons are:
- they want the shorter credit reporting period (only seven years for Chapter 13 in contrast to 10 years for Chapter 7).
- they want to stop foreclosures, cure mortgage or car defaults, which can’t be done in Chapter 7.
- they have tax debt problems which can sometimes only be solved in Chapter 13.
- they want to strip a second or third mortgage that has become entirely under water due to a decline in property values.
Chapter 13 allows a person to force a long-term payment plan for deliquent amounts on mortgage lenders and the taxing athorities. This is very powerful and popular tool.
Chapter 13 is also not a liquidation chapter like Chapter 7. What that means is that noone ever loses property in a Chapter 13. Chapter 13 is a reorganization chapter of bankruptcy. Sometimes this is very important to people, because while many people have very limited property and would lose nothing in a Chapter 7, some do have non-exempt property that would not be protected in Chapter 7–like excess equity in houses, cars or other valuable property. When these people need debt relief, often the best and only way to get it is through Chapter 13. Since 2011 and the modernization of Massachusetts exemption laws, fewer people need Chapter 13 for this reason, but it is still common.
It is usually very quick and painless for us to determine if you have non-exempt property. You can contact us to find out.
The Chapter 13 Plan
In Chapter 13, your lawyer proposes a plan for the Court to approve. The plan is a written document, usually of about five pages. If the plan complies with the bankruptcy laws, your creditors cannot refuse to accept it. This is the primary power of Chapter 13 bankruptcy.
If you file Chapter 13, you make the monthly payment set forth in your plan. This money is sent to the Chapter 13 trustee, a quasi-governmental official, who holds the money pending the court’s approval of your plan. Once your plan is confirmed by the court, the trustee begins making payments to your creditors in the manner provided in your plan.
The Applicable Commitment Period
How long does a plan last? This is determined by your income and household size. If you are above-median income based on household size, your plan is five years (60 monthly payments). If you are below median income, your plan is three years (36 monthly payments). During your applicable commitment period, you pay your “projected disposable income” into the plan.
Projected Disposable Income
This is the central idea of Chapter 13. The idea is that you devote your excess income to your plan for a certain period of time, and then you get rewarded with debt relief. Your projected disposable income is calculated with the means test as well as with a more simple and intuitive budget analysis. The result of this analysis is the amount that the system deems it fair for you to pay into your plan–after what you need to pay for housing, transportation, food, taxes, medical expenses, utilities and all the other reasonable and necessary expenses of life are deducted. That amount is called your “projected disposable income.”
How is a Chapter 13 Payment Amount Determined?
Your payment will depend on your income, assets, expenses and debts, but the key factor is your “projected disposable income.” That is number is based on a means test and budgetary analysis. These are two separate tests and incorporate your income, expenses, secured debt payments and several other variables.
We usually can tell you approximately what your payment will be when you first contact us. Determining the amount of a Chapter 13 payment is one of the specialized parts of the process, and it is something we have a lot of experience with. It is important to have an honest lawyer who really knows Chapter 13 law and the permissible means test deductions. Many of these deductions are not common knowledge among novice practitioners in the field.
What are the Advantages of Chapter 13 Bankruptcy?
First of all, it gives you the ability to make a single debt payment that is affordable based on your income. You will still have to make most mortgage and car payments, if you want to keep the house or car, but your unsecured debts are consolidated into the Chapter 13 plan. Secondly, a plan gives you the ability to do other things that are relevant for people in some situations. For example, in Chapter 13 you can stop foreclosures by curing mortgage arrears, cram down car loans, strip off wholly unsecured second and third mortgages, and pay off nondischargeable tax debts. Ultimately, your plan is based on what you want to accomplish and also on your income, expenses, assets and debts.
Chapter 13 bankruptcy will stay on your credit report for seven years, while Chapter 7 remains on your credit report for 10 years.
The bottom line about Chapter 13 is this: You pay what you can afford after your reasonable expenses for a set period of time, then you emerge from bankruptcy with a clean slate and a fresh start. You can click here to read about fees and here to contact us.
Qualifying for Chapter 13 Bankruptcy
The debt limits for Chapter 13 are $360,475 for unsecured debt and $1,081,400 for secured debt. If you have more in either category of debt, you do not qualify for Chapter 13, and you must file Chapter 11 if you want to reorganize.
Otherwise, as long as you are an individual with regular income who can afford to pay your living expenses, secured debt payments for property you want to keep, and an extra amount as a Chapter 13 plan payment, you qualify for Chapter 13 bankruptcy.
You can give us a call at 617-338-9400 or submit this form if you want to get a free consultation and fee quote for your case.