Chapter 13 has always been an option for individuals, couples, and sole proprietors (not corporations) who are struggling financially. Since the changes to the Bankruptcy Code under BAPCPA in 2005, more people may have to file Chapter 13 rather than Chapter 7. When a debtor’s income exceeds the state’s median income, he or she may not be able to file Chapter 7 because the law determines that there is a surplus available to repay a portion of his or her debt.
Debtors are subjected to a calculation called “The Means Test” if their current monthly income is higher than the state median for a family of the same size.
Your attorney will “run” the Means Test, and if there is disposable income remaining in your budget after you have deducted allowable basic living expenses set by the IRS, you will likely have to file Chapter 13 Bankruptcy.
How does Chapter 13 Bankruptcy Work?
Most of the time the payments required to be paid with a Chapter 13 plan are substantially smaller than if the debtor made payments to the creditors directly. This is in part because the creditors will not be paid with the contract and/or default rate of interest. Quite often the unsecured creditors will not be paid any interest. Monthly payments are made to the trustee of the bankruptcy court over three to five years, and the trustee is responsible for disbursing the funds to the creditors.
Chapter 13 also provides a great opportunity to bring past due mortgage payments current, to pay recent tax debts in full, or to catch up on unpaid child support obligations.
Speak with a knowledgeable bankruptcy attorney for guidance on how Chapter 13 may be available to help you with your financial problems.