Chapter 13 is often referred to as a "wage earner plan." The concept behind a Chapter 13 bankruptcy is that you and your spouse, if any, make sufficient income to pay all of your current living expenses (e.g., rent, food, utilities, transportation, clothes, etc.) and have some money left over to apply to your debts. You submit a Chapter 13 Plan in which you set out a budget detailing your take-home pay and monthly living expenses. You pay the excess income to the bankruptcy trustee who then pays the money to your creditors. The plan lasts for 60 months unless your debts are paid in full in a shorter time. At the end of the chapter 13 plan, any amounts still owing on your unsecured debts are forgiven. In certain cases, chapter 13 allows us to lower the amount of your loans or give you a lower interest rate on certain loans. If you have a secured loan like a mortgage, deed of trust, or car loan that you are behind on, chapter 13 allows you to catch up the amount you are behind over time. Chapter 7 does not offer this option.
Chapter 13 is used to save a home that is in foreclosure. If your house is in foreclosure Chapter 13 can be used to force your lender to accept your current payments and back payments over a 3-5 year period. Furthermore, in Chapter 13 you can request that the court enter an order requiring the lender to meet with you in a court supervised mediation setting seeking a modification of your mortgage.
If your home is worth less than your first mortgage and you also have a second mortgage, Chapter 13 provides a means to strip or remove the second mortgage as a lien against you home and treating it as an unsecured debt.
Another major use of Chapter 13 is for people whose income is above the medium income. The bankruptcy code imposes a means test and if you have household income above the medium income for a household of your size you will generally be required to file Chapter 13 instead of Chapter 7. In those cases you will be required to pay disposable income in excess of a reasonable budget to your creditors. There are exceptions where you can make in excess of the medium income level and still qualify for a Chapter 7.
All Chapter 13 cases are subject to an Administrative Order which imposes (1) strict requirements for timely filing plans, (2) requirements for minimum payments to be provided for in the plan re mortgages to be modified, (3) requirements that plan payments start 28 days from date the petition was filed, (4) requires that plans include all payments due on secured debt even if the debt were current at the time of filing, (5) strict requirements to supply copies of tax returns for 2 years, paystubs or documentation of income for six months preceding date of filing, and may require information about a non debtors spouses income; substantial other procedures are set forth in the order.
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CHAPTER 13 BANKRUPTCY