Chapter 13 bankruptcy is essentially about repaying debts, not discharging them as in the case with Chapter 7 bankruptcy.
Chapter 7 is generally the best type of bankruptcy for most consumer debts whereas chapter 13 is suitable for only a few people. The following is an outline of how chapter 13 bankruptcy filing works.
Chapter 13 bankruptcy is most often the wrong type of bankruptcy for a lot of people.
It is estimated that 90% of all chapter 13 bankruptcies end up failing and being dismissed
Chapter 13 Prolongs The Pain
A lot of people file chapter 13 for the wrong reasons. They mistakenly believe that chapter 13 bankruptcy is the responsible way to go. They think that they are morally obligated to repay the debts under chapter 13.
Chapter 7 Bankruptcy ends the pain of debt immediately but chapter 13 prolongs it for a long time.
Most people who file chapter 13 bankruptcy fail to follow through with it and eventually have it dismissed and end up filing chapter 7 after all.
This is because when people are faced with crushing debt, unless the root cause of the debt burden is removed, the problem continues in chapter 13 bankruptcy. For example if a person does not have enough income to pay their debts before chapter 13, under chapter 13 they still will not have enough income to repay their debts.
Lawyers Rip Off Chapter 13 Debtors
The second reason chapter 13 bankruptcies fail is that the system is set up to allow chapter 13 bankruptcy lawyers to rip off their clients. Here is how the system works.
Let us say that under chapter 13 bankruptcy you are scheduled to repay your debts at a rate of $1,000 per month. If you hire a chapter 13 bankruptcy lawyer, he or she will get paid first before your debts get paid.
The end result is that by the time your lawyer has gotten paid all their legal fees, you have run out of the will or the ability to continue the chapter 13 bankruptcy payments.
You may wonder how this is possible when there are chapter 13 bankruptcy lawyers advertizing fees as low as $500 to start. Their advertized teaser rates mask their real fees which usually exceed $7,000.
They sell you on the idea that they will be representing you at a monthly fee of say, only $300 over the course of three years but they do not tell you that the trustee will pay them all of the money you give them, before they start paying creditors.
Trustees do this because they are allowed to prioritize their payouts and they prioritize their fellow lawyer cronies ahead of the creditors.
Chapter 13 is Worse For Your Credit Than Chapter 7
The third reason chapter 13 bankruptcy is not suitable for most people is because it is worse for your credit than chapter 7.
Chapter 7 bankruptcy ends the pain immediately and allows you to begin rebuilding your credit from the day you file bankruptcy.
Under Chapter 13 bankruptcy, you cannot start to rebuild your credit until your bankruptcy is over, and that could be as long as 3 to 5 years, if it does not get dismissed before then.
During that 3 to 5 year period, lenders will not come near you because they know that everything you own is under the control of the chapter 13 bankruptcy trustee until your case is over.
On the other hand in chapter 7 bankruptcy cases, lenders will lend you money for a car loan as soon as you file bankruptcy. They do this because they know that you will not be able to file another chapter 7 bankruptcy for another eight years.
Also, they know that with your debts discharged, you will have lots of discretionary money to repay their new loan.
When is Chapter 13 Bankruptcy Right?
Chapter 13 bankruptcy is right when you are faced with foreclosure and you need some extra time to get caught up on your missed payments.
That is just about the only time chapter 13 bankruptcy is appropriate.
So if a person is not in foreclosure, chapter 13 bankruptcy may not be the right type of bankruptcy.
The Chapter 13 Process
The process starts out with the filing of a set of documents consisting of a petition as the main document, plus schedules which serve as addenda to it. There are also other documents in the set and they are called statements.
Like with chapter 7 bankruptcy, chapter 13 is mostly an administrative process and it is important to understand the difference between such a process and a judicial process.
Because chapter 13 bankruptcy is an administrative process, filing it does not initiate a lawsuit, and there is no adversarial relationship.
This means that you are not in trouble just because you are filing bankruptcy. It also means that unlike an adversarial process where there is a plaintiff and a defendant, you do not need to be represented by a lawyer.
It all comes down to preparing the documents properly and it does not matter who prepares them for you.
This is a very important fact worth emphasizing.
Chapter 7 bankruptcy filing is 100% about the information contained in the documents, not about whether or not it is prepared by a lawyer.
If that is the case, then what role do lawyers play in the process and why do so many people hire lawyers for chapter 13 bankruptcy?
The answer lies in judicial tradition. Court are used to lawyers representing clients and lawyers are always seeking the easy money, so the process allows for debtors to be "represented by lawyers," even though there is hardly any need for it.
The main role that lawyers play in the bankruptcy process is to advise their clients of their property rights. These property rights have to do with bankruptcy exemptions, and with collateral securing certain debts.
Right away we see that when you file chapter 13 bankruptcy, your main concern is to protect your important property, often your home.
Because chapter 7 bankruptcy filing is an administrative process, the law government provides an administrator to administer the case and that person is called a chapter 13 trustee.
The trustee's job is to see to it that the intent of bankruptcy law is carried out fairly. This very fact means that even if you are not represented by your own attorney, your estate has de facto representation. In other words, you are not alone. You are not that the mercy of your creditors.
The Automatic Stay
Once you file the bankruptcy petition, by operation of law, an automatic stay immediately kicks in. This stay is equivalent to a federal judge issuing a blanket order to all your creditors to cease and desist from initiating or continuing any adversarial actions against you.
You get this stay the moment the court filing clerk receives your petition and issues you a docket number. It means that from that very instant, all civil lawsuits involving money or property rights come to a standstill.
Creditors and collection companies are barred from harassing you or from attempting to repossess your car, foreclose on your house, garnishing your pay check or taking any hostile actions against you.
When you file chapter 13 bankruptcy, the court clerk has the responsibility of notifying all your creditors in writing of the commencement of your case.
They do so using a creditor mailing list that you provide to them as part of your chapter 7 bankruptcy documents package.
Note that you do not need to hire a lawyer to get the creditors notified. The court clerk does that for you.
Under the new bankruptcy law, you are required to take a credit counseling class before you file the petition, unless you have a real emergency.
If you have an emergency such as a foreclosure, you are required to take the counseling class right after filing the petition.
It is generally best to have your bankruptcy forms prepared before taking the counseling class since the certificate you get from the counseling class has an expiration date.
You do not have to have all of your information in order to file the petition. If you have an emergency, you can file an emergency petition without the schedules, and then amend the filing by filing the missing documents as an amendment.
You can also use the amendment filing process at anytime during your case, to make changes to the documents. This includes adding creditors that you inadvertently omitted.
So as you can see, you can file your bankruptcy today and worry about perfecting it later.
The Creditor Meeting
Approximately four weeks after filing the petition, you required to attend a meeting of creditors. It is also commonly referred to as the trustee meeting or the 341(a) hearing.
For chapter 13 cases, the meeting of creditors does not actually involve any meeting. There are no creditors at the meeting and they do not get to grill you there.
The creditors meeting serves mainly for the trustee to inform you of your bankruptcy rights and to make sure that you know what you are filing bankruptcy voluntarily.
If you were misled into filing bankruptcy, you can use the creditor meeting as the opportunity to bow out of your bankruptcy filing.
The hearing usually last for under a minute unless you want it to last longer, which would be the case if you have lots of questions for the trustee.
Most people let their documents talk for them and they usually prefer to be done with it very quickly.
If you have a lawyer with you at the creditor meeting, he or she cannot represent you in the usual sense. You must appear there in person and you must answer the trustee's questions with your own mouth, unless you have a medical or physical or mental incapacity.
What sort of questions does the trustee ask?
The trustee will first inform you of your rights and then they will ask you if the information in your documents is truthful. Typically they will follow it by asking you if the facts in the documents have changed since you filed the forms. That is usually all there is to it.
In fact most debtors are surprised how easy the process is, once it is over. Those who hired a lawyer are often disappointed with themselves for doing so in the first place, particularly when they see so many other debtors sail through the hearing easily.
It is important to note that a lawyer is not allowed to speak for you at the trustee hearing. They just cannot.
Why Creditors Do Not Show Up at The Meeting
The hearing is called as creditor meeting because it the concept is carried over from business chapter 11 cases, where creditors do show up. These are creditors who are often owed many millions of dollars by the bankruptcy business corporation.
In consumer chapter 7 cases, creditors do not show up because this hearing is mostly a formality required by law.
This does not mean that you will not find a representative for a major credit card company among the crowd of onlookers. Such representatives wait until your hearing is over and as you try to exit the building, they give your their business card and ask you to cal them if you what to reaffirm a debt or if you want them to still extend you credit in spite of your chapter 7 bankruptcy filing.
Repaying The Creditors
Chapter 13 bankruptcy uses all of the same documents as chapter 7 bankruptcy, except for the repayment plan.
Since the purpose of chapter 13 bankruptcy is to repay the creditors, there needs to be a repayment Plan. The Plan, as it is called, sets forth the schedule of payments that you will make through the chapter 13 bankruptcy trustee to the creditors.
Unlike for the rest of the chapter 13 bankruptcy forms that are mandated nationwide, there is no repayment Plan form that is mandated for use nationwide. Each federal bankruptcy district is free to adopt its own local form for the repayment plan. Some districts elect not to define a repayment plan form and leave it to the debtor to create whatever document they want to use to describe the repayment plan.
Repayment plans can run from 3 to 5 years.
Generally, the debtor makes their regular monthly payments directly to the creditors as usual. These payments are not included in the repayment plan.
The repayment plan focuses only on the funds that will be channeled through the trustee to the creditors. These funds are mostly for repaying arrearages or missed loan payments but can also include unsecured debts.
Let us say that you have a mortgage and your regular monthly payments are $2,000 per month and let us assume that you have missed 6 months of payments, for a total arrearage of $12,000 (6 X $2,000 = $12,000). You would pay the regular monthly payment of $2,000 directly to the mortgage lender as usual.
If you elect to repay the $12,000 in missed payments over a 36 month period, your monthly plan payments through the chapter 13 bankruptcy trustee will be $333 ($12,000/36 = $333), plus trustee administrative fees.
The Trustee's Administrative Fees
Chapter 13 bankruptcy trustee get paid for their service by collecting a percentage of all the moneys that are paid through them. Their fees range from 4% in some districts, to 10% in other districts.
Repaying Unsecured Creditors
Your repayment plan may also include payments to unsecured creditors such as medical bills and credit cards. This will depend on income and expense calculations in the bankruptcy filing.
You also have to pay your lawyer through the trustee and as we mentioned above, many chapter 13 bankruptcy lawyers use this opportunity to rip off their clients.
You can see how this repayment business can quickly get out of hand. This is one of the main reasons most chapter 13 bankruptcy cases get abandoned or dismissed in the first year.
If you are eligible to file chapter 7 bankruptcy, it is easy to see why it is the better route.
In addition to the creditor meeting, there is also a confirmation hearing for chapter 13 bankruptcy cases. The purpose of the confirmation hearing is for the judge to review and approve your repayment plan.
It is important to note that a chapter 13 bankruptcy repayment plan is only a proposal. The repayment plan you propose to the court will almost certainly be modified by the judge, based on actual data from the secured creditors regarding the arrearages.
This is good because, except where the debtor does not have enough discretionary income, the chapter 13 bankruptcy will not be dismissed at this point if your plan is not acceptable. In such as case, the judge will modify the plan to something that is acceptable.
The Budgeting Class
After your creditor meeting, you are required to take a short budgeting class. This class is aimed to helping you learn how to manage your finances so that you do not run into financial problems again.
As with the initial credit counseling class, it usually costs a few dollars and can be taken online or by phone from any of the many class providers who advertize online.
We provide our customers a list of all the class providers for their convenience.
One of the duties of the chapter 13 bankruptcy trustee is to see if you have too much equity in your assets and to liquidate those assets and use the proceeds to repay creditors, in the event that you decide to discharge some debts rather than repay them.
The vast majority of consumers do not have to worry about that because they do not have equity in excess of the allowed limits. These allowed limits are called Exemptions.
Exemptions set forth the limits of equity you are allowed to keep for each category of asset. These limits are very generous, so most people have no risk of losing anything to the trustee.
These limits make sense considering that it would not be fair for a multimillionaire to file chapter 13 bankruptcy and to keep millions of dollars in cash or to kept their private yacht. But for the average consumer, that is not the case.
When you choose our full-service bankruptcy preparation, you do not have to sweat over exemptions since it is integral to product. We have you covered.
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