Chapter 13 Bankruptcy: Is 13 Your Lucky Number?

Journey through the infinitely complex and fascinating world of Chapter 13 bankruptcy including why one would choose Chapter 13, mortgage lien strips, stopping interest and charges and determination of the plan payment. This video tells you exactly what you need to know about how to get rid of toxic debt. Starring James P. Doan, Esq. and Emily Chase Smith, Esq.

In The Wonders of Number 7, Parts 1 & 2, we talked about the bankruptcy process using Chapter 7 as our example. Now we'll give you the rundown on how Chapter 13 differs, and differ it does. We've said that Chapter 13 is a restructuring and repayment of some or all of your debt and takes about 3-5 years. So now let's look at exactly debt is restructured and why anyone would want to do this. Well, people will do things either because they want to or they are forced to - think vegetables on the table before a 4-year-old and a 40-year-old. Those veggies might be eaten by both, but for very different reasons. The federal government is the scolding mother, withholding the delicious hot fudge sundae until the brussel sprouts are eaten. In the bankruptcy context this is Bankruptcy Code sections that require people whose income is more than the median (or average) income for their state and have money left over at the end of each month, using the Bankruptcy Code's criteria, you're in chapter 13.

You as the 40-year-old adult might choose to eat the brussel sprouts of your own volition because of the benefits of brussel sprouts have that sour cream and onion chips just don't. One of the greatest benefits of a chapter 13 is the mortgage lien strip. If you have a second, or third mortgage on your house and your house is worth less than is owed on the 1st, you can "strip" the second and third and end up with only the first mortgage at the end of the bankruptcy. That means that at the end of 3-5 years you could have a home with a mortgage much closer to what you owe on it. You're still underwater, but you're peaking out…

One of the other great benefits of a chapter 13 is the interest and charges on all your debts, including back taxes, stop accruing so you can pay them back. The goal post is no longer moving. A chapter 13 is more complicated than a 7 since it's designed to give each creditor fair treatment based on the characterization of the debt – some debts get paid 100%, like child support, back amounts on a mortgage, and some, like credit cards, get a share of the money. You and your attorney put together the plan using a formula taking into account your income and allowable expenses. You want to get it right because you're going to be living with it for awhile. Creditors get a chance to make claims, usually that you owe more than you indicated, never the other way around, and creditors and the trustee can object to the plan. But once the dust clears, as Hannibal of the A-Team always says, "I love it when a plan comes together."

The 341a meeting is more complicated in a chapter 13 because there are more moving parts and you have an additional hearing, the Plan Confirmation Hearing. Once the plan is in place, you have one payment to make to the trustee monthly and you keep secured items like your house and car current. Then you cruise through the 3-5 years and at the end you receive…wait for it….the golden ticket of discharge.

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