This article is for informational purposes only. Ascend does not provide legal advice and is not an attorney. If you’d like to speak with a bankruptcy attorney that serves your city, you can speak with one in a free consultation.
Is Chapter 13 worth it? We often hear that question from people struggling to pay their bills. They want to know if Chapter 13 will help them get out of debt or cause more financial heartache for their family.
Below are examples of Chapter 13 success stories. These examples explain how a Chapter 13 bankruptcy case could help someone work out a manageable payment for their debts to avoid facing foreclosure, repossession, and other debt collection actions.
Chapter 7 vs Chapter 13 Bankruptcy
There are many differences between a Chapter 7 vs Chapter 13 bankruptcy. A Chapter 7 bankruptcy requires that you pass an income test to receive a bankruptcy discharge (debt forgiveness). If your income exceeds a certain amount, you may not qualify for a bankruptcy discharge under Chapter 7 bankruptcy unless your debts are primarily business debts. The purpose of the Chapter 7 bankruptcy process is to provide debt relief for individuals who cannot afford to repay their debts. If you haven’t checked, you may estimate Chapter 7 qualification using our Chapter 7 calculator.
However, Chapter 13 bankruptcy cases are designed for individuals who can afford to repay some of their debts, but they need help restructuring their debts into an affordable plan. Through the Chapter 13 bankruptcy process, debtors (the individuals who file the bankruptcy case) propose a plan that repays some or all of their debts. The Chapter 13 bankruptcy is a 3 or 5 year plan (with the exception of a 100% plan).
Calculating Chapter 13 Plan Payments
Your Chapter 13 plan payment depends on your unique financial situation, which is why we built a Chapter 13 Plan Payment calculator below that you can use to estimate your Chapter 13 plan payment.
The calculator below will also include how much estimated the Chapter 13 lawyer fees will cost you.
Examples of Chapter 13 Success Stories
These examples are scenarios of what could happen when someone files for bankruptcy under Chapter 13. Please note that each bankruptcy case is different. These stories reflect what might happen given a specific set of circumstances. They are not legal advice or a reflection of what could happen given other circumstances.
Chapter 13 Success Story – Saving a Home from Foreclosure
Facing foreclosure is a common reason for filing a Chapter 13 bankruptcy case. An individual gets behind on their mortgage payments because they lost their job. They found a new job, but not for several months. The mortgage company demands payment in full of all past due payments, or they intend to sell the home at a foreclosure sale.
No matter how hard the person tries, they cannot catch up on all past due bills. They even work a part-time gig, but it is not enough. The mortgage company forecloses.
A foreclosure sale is stopped in Chapter 13 bankruptcy. When the person files Chapter 13, it stops the foreclosure. The mortgage lender must work through the bankruptcy court now.
The homeowner can catch up on their mortgage payments in their Chapter 13 plan over 36 to 60 months. The manageable payment also pays what they can afford to pay toward unsecured debt. Therefore, when the person finishes their bankruptcy case, their mortgage payments are current, and they get rid of the rest of their unsecured debts. They only owe their mortgage company and monthly expenses.
Chapter 13 also prevents the repossession of vehicles. A debtor can include their car payment in their Chapter 13 plan to avoid losing their car.
Chapter 13 Success Story – Avoiding Consequences for Domestic Support and Other Non-Dischargeable Debts
Some unsecured debts cannot be discharged in bankruptcy. Those debts include most personal taxes, alimony, and child support. Even though you file bankruptcy, you still owe these debts. However, if you file Chapter 13, you can repay those debts over more time.
For example, a dad had an accident and could not work for six months. During that time, he fell behind on his child support payments. After returning to work, he tried to catch up but could not. Now, he is facing court action and other consequences for past-due child support.
The dad files a Chapter 13 bankruptcy case. He includes his past-due child support in the bankruptcy plan and begins making his regularly scheduled child support payments. He must make all future child support payments on time as part of his Chapter 13 case.
The court confirms his Chapter plan. Now, he can catch up on the back child support payments, avoid penalties, and get rid of his other unsecured debts with a manageable payment. The situation could apply if someone were behind on alimony payments or past due income taxes.
Chapter 13 Success Story – Protecting Property from Creditors
When you file for bankruptcy relief, you can claim some of your property as exempt. There are federal bankruptcy exemptions, but some states require you to use state exemptions. An exemption protects a specific amount of equity in property from being used to pay your creditors.
Most individuals file for bankruptcy under Chapter 13 or Chapter 7. In a Chapter 7 bankruptcy, the bankruptcy trustee can seize non-exempt assets to pay the person’s unsecured debts. Non-exempt assets are things you own that are worth more than the exemption. The trustee sells the property and uses the money to pay your creditors.
For example, a person has tens of thousands of medical bills they cannot pay, along with credit card debt and other bills. They need to get back on their feet, but they need help. The problem is they have some assets that have equity above the exemption amounts. If they file Chapter 7, the trustee may take the property and sell it.
They filed for Chapter 13 instead of Chapter 7 bankruptcy. In a Chapter 13 bankruptcy case, the trustee does not seize non-exempt assets. Instead, you add the amount of non-exempt equity to your bankruptcy payment. Since the amount is spread out over 60 months, it is a manageable payment that allows you to get rid of your debts and keep your property.
Chapter 13 Success Story – Saving a Couple’s Retirement
Suppose a couple has a significant amount of debt they cannot pay. They consider settling their debts with their creditors. Debt settlement requires you to negotiate with a creditor to take less than is owed on an account for one lump sum. However, they must have access to money to make the payments.
The couple has retirement funds and equity in their home. If they use their retirement money and the equity in their home to settle the debts, they will not be able to retire for another ten years. When they do retire, they will not have enough money to pay their living expenses.
Most retirement accounts are exempt in bankruptcy. They also live in a state with significant home exemptions, so the equity in their home is protected. By filing Chapter 13, the couple pays what they can afford to pay their creditors for 60 months and discharges the remaining debts. They can retire without the burden of overwhelming debt and with the resources they need to pay their living expenses.
Is Chapter 13 Right For You?
Whether Chapter 13 bankruptcy is right for you depends on your circumstances. The first step is to complete the bankruptcy Means Test. The Means Test calculates disposable income to help determine whether you qualify for a bankruptcy discharge in Chapter 7. If not, you may need to file a Chapter 13 bankruptcy to get rid of your debt. Chapter 7 is for debtors with insufficient disposable income to pay their creditors after paying their living expenses.
Chapter 13 helps people who can afford to pay some of their debts, but not all of them. It allows people to get out of debt and back on their feet while protecting their property and income from creditors.
You can use the calculator below to estimate your Chapter 13 plan payment.
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