Chapter 13 bankruptcy is a Debt Reorganization Plan commonly known as “wage earner” in Tennessee. All of your debts are combined and the Chapter 13 trustee is paid who disburses the payments.
A common question is why would I need to file a Chapter 13 bankruptcy instead of a Chapter 7?
The first reason is to stop the student loan collectors from garnishing your wages and your tax refund. Student loans are paid through the plan that usually lasts 5 years. The student loans accept the amount we calculate for their share of the plan and it prevents them from instituting collection procedures for 5 years and the debt is actually paid down. Also penalties and late fees stop, however, interest still accrues. The Chapter 13 bankruptcy can enable you to determine a permanent settlement and be free of garnishments for up to 5 years.
The second reason for filing Chapter 13 bankruptcy is to enable you to retain your residential home and an affordable repayment plan. Filing for Chapter 13 bankruptcy allows you to place the amount you are behind by into the Chapter 13 repayment plan and the mortgage company will pay the same way as other secured creditors by the Chapter 13 trustee. At the end of the plan, the mortgage will be current and since the remainder of your unsecured debt will get discharged, you’ll be able to afford to make the monthly payments.
For example, if your house payment is $500.00 a month and you’re behind by $3,000.00. The $3,000.00 would go into the Chapter 13 debt payment plan, the $500.00, which is your regular payment, would also go into the plan so the trustee would essentially be distributing the $500.00 of your regular house payment plus the amount necessary to repay the mortgage arrearages.
The third reason to chose Chapter 13 over Chapter 7 is to pay delinquent child support. While child support can not be discharged in bankruptcy, the arrerages can be paid over the life of the plan (usually five years). This will prevent collection efforts as long as the case is active.
The fourth most common reason to consider filing for Chapter 13 bankruptcy instead of Chapter 7 bankruptcy is having too high of an income to qualify under the means test, which is required to qualify to file for Chapter 7 bankruptcy. While you may feel that you need or at least want to file Chapter 7, making a little too much money can disqualify you from this type of bankruptcy. The other way you can be forced to file Chapter 13 Debt Reorganization is if your income exceeds your expenditures. It would take an analysis from a bankruptcy lawyer to learn if this is a factor. The means test is a government calculation, which is allegedly supposed to be a test line. The government’s calculation is based on your income and Internal Revenue Service created living expenditures depending on family size, then create a determination of a Chapter 7 or Chapter 13. The means test is a calculation using the financial information and expenditures, is designed to determine based on your income or means whether you should be able to qualify for a Chapter 7 bankruptcy. However, just because you have too much income to qualify for Chapter 7, does not mean that you are not eligible to file bankruptcy all together. This is one case where Chapter 13 bankruptcy may be the best option.
It is very important to understand, that even if you do not qualify to file for Chapter 7 bankruptcy due to your income, or you’re behind in your mortgage payment and you want to save your house, filing Chapter 13 bankruptcy can help you save your house, your car and stop wage garnishments.