Chapter 13 Bankruptcy

Chapter 13 bankruptcy is an interest-free debt repayment plan through which you consolidate your debts and make a payment on your debt over a 3 to 5 year period.

If you don't qualify for a Chapter 7 Bankruptcy due to Excessive Income which is determined by taking the "Means Test" you still have the opportunity to get some debt relief through a Chapter 13.

While in a Chapter 13 debt repayment plan, the creditors cannot collect from you, and the creditors are required by a Federal Court order to adhere to the terms of the plan.

One very important thing to remember about Chapter 13 bankruptcy is that you must be working or have a consistent source of income for your repayment plan to be approved by the court. Not only must you be able to pay for your monthly living expenses, but you must also be able to make a payment to the court to consolidate your debts.

Debts that are generally consolidated in a Chapter 13 bankruptcy are mortgage arrears, balances on vehicle loans, student loans, credit card debts and other unsecured debts. All outstanding debts must be included in the Chapter 13 consolidation.

Secured debts are paid 100% on the dollar, while unsecured debts may be paid less than 100% on the dollar.

More Information about Chapter 13

The Means Test

The Bankruptcy Code was significantly amended with a general effective date of October 17, 2005. It was Congress’ intent to make those who could afford to pay back a portion of their debt ineligible to eliminate their debt in a Chapter 7 bankruptcy. This intent is being carried out by the advent of the “means test”. This test can be invoked by any creditor, the trustee, the court or the U.S. Trustee.

To determine if a debtor can afford to pay back a portion of his debts, you must commence a complicated mathematical equation.

You must first take the debtor’s current monthly income (CMI). If the debtor’s CMI is less than the state median income, the debtor can file a Chapter 7 and no further calculations are required. For information on state median incomes, visit http://www.census.gov/hhes/income/4person.html.

The actual (CMI) is the average monthly income received by the debtor (and the debtor’s spouse in a joint case) during the six month period prior to the petition date. This prevents a debtor who is out of work for one month from claiming that he cannot pay back his debt. He may in fact have a high (CMI) if his income from the prior five months was great. For debtors who have lost their jobs this can be an unfair evaluation. In some cases your attorney may advise you to wait a month or two before filing.

If the debtor’s CMI is greater then the state median income, then you must continue to calculate in accordance with the means test formula to determine if the debtor can file a Chapter 7 or not.

If the debtor’s CMI less allowable deductions is less than $100.00 then the debtor can file for bankruptcy under Chapter 7. If the debtor’s CMI less allowable deductions is greater than 167.00 then the debtor must file a Chapter 13 bankruptcy.

If the debtor’s CMI less allowable deductions is between $100.00 and $166.00, then he may need to file under Chapter 13 depending upon the amount of unsecured debt and the percentage that could be repaid using the debtor’s disposable income over a five year period. If the disposable income amount is not enough to pay 25% to unsecured creditors over a five year period, the debtor can file a Chapter 7. Thus, the amount of debt is a factor in determining whether the debtor must file a Chapter 13. The greater the debt, the more likely that the debtor will be able to file a Chapter 7. As you can see, the math calculations are very complex.

Additionally, you cannot utilize the debtor’s expenses when calculating disposable income. Disposable income is now based upon expense standards provided by the Internal Revenue Service as they relate to the local area in which the debtor lives.

If the debtor has disposable income of $167.00 per month, he will always fail the means test, regardless of how much unsecured debt the debtor may have. Additionally, the Chapter 13 plan will have to be for five years, not three years.

The presumption of abuse or failing the means test can always be rebutted. The debtor will have to demonstrate special circumstances that would decrease the income or increase the expenses, so that the debtor actually qualifies for Chapter 7. For example, the debtor may have constant medical expenses which are beyond the limits of IRS guidelines. That debtor may be able to rebut the presumption of abuse under the new means test.

Excess Income

One of the documents you have to file with your bankruptcy is a budget which demonstrates to the court how much income you have each month and how much you need to pay your taxes and living expenses. If your budget shows that you have income you do not need to pay taxes and live on, the court will require that you pay that excess income over to a trustee for a three year period in partial payment of the creditors.

The plan under which you make those payments to the trustee is known as a "chapter 13" or "wage earner" plan. The attorney's will help you determine whether or not you have excess income based upon the information you provide at your free initial consultation.

Stop Foreclosure Immediately

If your home is presently in foreclosure, a Chapter 13 bankruptcy filing will stop the foreclosure any time prior to the sale, and allow you to repay your mortgage arrears through your Chapter 13. You will still be obligated to make all future mortgage payments directly to the mortgage company, but they may not foreclose to collect any outstanding mortgage payments.

Save Your Car

If the "repo" man is looking for your car, a Chapter 13 bankruptcy will also stop the finance company from repossessing your car. The past due payments and the entire balance on your vehicle loan will be consolidated, which you will pay off over the next three to five years. The vehicle finance company can no longer repossess your car, and you will no longer have to make a payment directly to the finance company. Only one payment is made, and that is to the Chapter 13 trustee.

Consolidate Student Loans

Although you may not eliminate student loans in a Chapter 7 bankruptcy, you can consolidate them, with your other bills, in a Chapter 13 and stop collection action against you. Robert Hahn will stop the collection action and garnishments related to student loan debts and consolidate your bills so that you may repay them in a plan that is feasible for you.

Protect Cosigners

Your cosigners receive the same protection that you receive under Chapter 13 bankruptcy. Through a Chapter 13, we will protect your cosigners from collection activity, and the creditors must wait to be paid. So, if you friend or relative cosigned on your vehicle, and you are having trouble affording the payments, we can put your remaining balance inside a Chapter 13.

Beware of Refinancing

If you have equity in your home, you can file a Chapter 13 bankruptcy, protect your equity, and repay your mortgage arrears over as long as three years. Refinancing or taking out a second mortgage may just create an additional mortgage payment that you cannot afford, instead of repaying your mortgage arrears through a Chapter 13.

Why eat up your equity with another mortgage?

You should explore all of your options, and make sure you contact us along the way so we may advise you of your legal rights. When you have quality legal representation, you become knowledgeable about your rights, and become less vulnerable to people trying to take advantage of you in a time of distress. Please remember that we offer a free consultation. Explore Chapter 13 bankruptcy as an alternative to a high-interest rate equity loan against your home.

Note: We are a law firm and under the bankruptcy code are considered a debt relief agent who helps people file for relief under the bankruptcy code.

We represent clients in Western Washington, Spokane, Washington and other Eastern Washington communities, including Cheney, Clarkston, Colfax, Colville, Davenport, Ephrata, Moses Lake, Newport, Odessa, Pullman, Ritzville, Republic, Wenatchee, Seattle, Yakima and Walla Walla. We also represent clients in North Idaho, including Bonners Ferry, Coeur d Alene, Hayden, Lewiston, Moscow, Post Falls, Sandpoint, Wallace, Priest River, Plummer, St. Maries and Potlatch.

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