Chapter 13: How To Handle Debts When They Become Overwhelming
Chapter 13 of the bankruptcy code allows individuals the opportunity to gain some relief from their debts. Used properly, it can also all a person to develop the financial habits that will prevent debt from growing too large to manage, ever again.
The Chapter 13 Plan
The centerpiece of a Chapter 13 bankruptcy filing is the plan. In essence, the Chapter 13 plan is a budget. When drafting your Chapter 13 plan, you and your bankruptcy attorney sit down and evaluate your income and your debts, and develop a strategy that allows the use of all of your disposable income, after necessary living expenses, to paying your debts.
By filing which Chapter 13, you obtain protection from creditors for the duration of the Chapter 13 plan, usually lasts three to five years. This stops the incessant phone calls and mailings demanding payment. You make your payments to the Chapter 13 trustee, who pays your creditors.
Once the plan is confirmed, it is essential you make timely payments to the trustee. If you need to purchase an item that would require a new debt, you need to consult the trustee, as that may affect your ability to make plan payments. It is suggested that plan payments be made through a payroll deduction. This practice increases the likelihood that payments will be made on time and that you will complete the plan.
Failure to make the required payments under the plan may cause a creditor or trustee to ask the court to dismiss the case. Should that happen, you would lose the protection of the bankruptcy stay, and your creditors could restart collection activity, including foreclosure or repossession.
Chapter 13 allows you to recover from setbacks like falling behind in your mortgage. Once a plan is approved, you will be able to pay mortgage arrears over a five-year period, and may ultimately save your home from foreclosure.
In addition, because Chapter 13 allows individuals to reschedule other secured debts and extend them over the life of the plan, stretching out the payments over five years can make your existing payments more manageable.
Some taxes can be discharged in bankruptcy. Like most realities related to taxes, the specific taxes that can be discharged are governed by a complex set of rules. Generally, for income taxes, you have to have filed proper returns and the debt must be at least three-years old. There are other requirements, but your bankruptcy attorney can help you assess if you are eligible.
Of concern to many younger individuals is the issue of student loan dischargeability. Typically, student loans are not dischargeable. However, there is an exception, known as undue hardship, which may be used in rare cases.
What constitutes “undue hardship” varies. Tennessee is in the Sixth Circuit, which uses the Brunner test to evaluate whether a particular borrower has sufficiently demonstrated an undue hardship. The Brunner test requires a showing that:
- the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans
- additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans, and
- the debtor has made good faith efforts to repay the loans
Credit card debt is considered unsecured debt (not tied to any particular item of property, like a home or car) and can be discharged in a Chapter 13. The question of how much may be discharged varies with each situation.
The plan is heavily influenced by how much disposable income is available to pay to creditors. To determine “disposable income,” one must calculate the debtor’s “current monthly income” and the amounts reasonably necessary to be expended for the maintenance or support of the debtor or a dependent of the debtor. This calculation is part of the means test.
This, again, is not a simple calculation and contains numerous factors. A bankruptcy attorney can assist in determining this amount. A knowledgeable calculation of this number is critical, as it will become the foundation upon which your plan is constructed.
Success in Chapter13
In order to have a successful Chapter 13, you need to have a viable plan; this is very important, as you will have to live with this budget for the next three to five years. It will control all of your spending and any changes in the plan require court approval. In order to receive the counsel necessary to craft a viable Chapter 13 plan, please contact an experienced bankruptcy attorney.