Chapter 13 is the section of the Bankruptcy Code providing for adjustment of debts of an individual with regular income. Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years. Chapter 13 is the most common way that individuals and families are permitted to retain their homes if they are behind on their mortgages. In Chapter 13, it is required to file a Chapter 13 payment plan. In that plan, you will be required to pay on your secured loans (mortgages and car loans), along with delinquent real estate or income taxes. In addition, any unsecured debts such as credit cards, medical bills and personal loans are also treated.
A Typical Case
John is facing the foreclosure of his home, as he is now six months behind on his mortgage payments and the mortgage company has refused to accept anything less than all of the missed payments. Given that he has no way to come up with all of the missed payments in one lump sum, he chooses to file Chapter 13 bankruptcy. Immediately upon filing the Chapter 13 case, the mortgage company must halt all foreclosure efforts and must instead deal with John in the bankruptcy courts. John’s monthly mortgage payment is $750 and his mortgage arrears are $6,000. He also has a car loan of $375 per month, $2,500 of delinquent real estate taxes and $10,000 in credit card bills.
The Chapter 13 payment plan filed for John will address all of his debt problems, not just the mortgage. He will have one monthly payment to the Chapter 13 Trustee, the office charged with the financial oversight of his case. John’s monthly Chapter 13 payment will be $1,300, which includes his ongoing mortgage payment, his car payment, along with the mortgage arrears, the delinquent taxes and the credit card bills. He will also be required to begin making his Chapter 13 payment in the very first month of the case, even prior to his attendance at his court hearing. Because John is a wage earner, it is required that the Chapter 13 payments be made via automatic wage attachment.
John will have one court hearing, held in the Office of the Chapter 13 Trustee. Generally, the meeting/hearing takes approximately 10 minutes. If John has filed all of his income tax returns and has supplied the Trustee with copies of paystubs and his last tax return, then he will not be required to return to the Trustee’s office for any follow-up hearings or meetings. During the meeting, the Trustee will inquire as to whether John has lived in Pennsylvania for the past two years, whether he has previously filed bankruptcy, whether he pays child support or alimony, whether he has read and reviewed all of the Chapter 13 bankruptcy paperwork filed by his attorney.
Generally, most Chapter 13 plans take five years to complete. For most individuals with mortgage arrears, the 60-month period is well-suited because it stretches out the period of time in which to catch up on the arrears. During the five year period, however, if John’s financial circumstances change, then his payment plan could be modified. He could choose, for example, to surrender his house if he no longer wishes to reside there. In that case, he might be eligible to convert his case to Chapter 7 bankruptcy, which would wipe out his credit card debt, among other things. In some instances, if John were to lose his job for a period of time, he might be able to reduce his plan payment somewhat if his original plan was paying a dividend to the unsecured creditors.
At the end of John’s case, he will receive a Discharge Order, which wipes out his credit card bills and confirms that his mortgage is current and his taxes and car loan have been paid in full. He has likely long since received his car title directly from his lender. At that point, he will resume making direct payments to his mortgage company and will no longer have his automatic payroll deduction. The fact that he has filed Chapter 13 bankruptcy will remain on his credit report for a total of 7 years from the date in which he filed his bankruptcy case. Thus, if he makes regular payments to his mortgage company, then his credit rating may be reasonably good in about two years following the bankruptcy discharge.