Chapter 13 Bankruptcy

Why should you file a Chapter 13 bankruptcy over a Chapter 7 bankruptcy?

You might need to file under the Chapter 13 bankruptcy code because you make too much money to qualify for a Chapter 7.  The 2005 Bankruptcy Act now makes it more difficult for people with higher incomes to liquidate their debts in bankruptcy. For example, if you live in a household of four people and earn a net income of $86,637 or more, you might not qualify to file the Chapter 7 bankruptcy code.

Even if you financially qualify for a Chapter 7 bankruptcy, you might choose to file a Chapter 13 bankruptcy because it will allow you to:
*Pay off child support arrearages or overdue mortgage payments over a longer period of time.
*It might discharge some marital debt incurred through a divorce.
*It might give you a breather from student loan payments. 
*It might reduce both the amount of your car loan and the interest rate on your car loan.

How does a Chapter 13 work?  In a Chapter 13, you set up a ‘payment plan’ with the bankruptcy trustee.

*The bankruptcy plan is calculated by subtracting the amount of your monthly living expenses from your income.  These monthly living expenses do not include the debts that you would be paying off in the re-payment plan, such as credit cards.   For example, if your income exceeds your expense by $600 each month, this is the amount that you would pay to the trustee.

*The trustee then pays off your creditors, often at a reduced rate. Your mortgage payments would not change, but the amount of your car loans might change. The amount the trustee pays on your credit card payments could be significantly reduced.

How long do these ‘plans’ last?

*If you are in a Chapter 13 plan because your income won’t let you file a Chapter 7, you will be in the plan for five years.

*If you choose a Chapter 13 over a Chapter 7 because you think it will work better for you, you can choose a three year payoff plan.

Are Chapter 13 plans successful?  Usually, not: 80% to 85% who file a Chapter 13 plan fail.

What if my Chapter 13 plan fails? You might be able to convert your filing to a Chapter 7 case, even if you originally would not have qualified for a Chapter 7 because you made too much money.

How much do I have to pay an attorney to file a Chapter 7? Minnesota’s bankruptcy rules prohibit fees exceeding $3,000 without special permission from the bankruptcy court.

What is the process in filing a Chapter 13 bankruptcy petition?

*First, you meet with an attorney (Herb Kroon or Chris Carpenter) in our office to review your situation to determine which chapter in the bankruptcy code works best for you.  If we agree that a Chapter 13 petition best meets your needs, we will ask you to fill out a bankruptcy questionnaire. This questionnaire will give us information about your income, expenses, assets, and debts. It is very, very important that you carefully and thoroughly fill out this questionnaire.

*Next, we will use the information from your questionnaire to draft a bankruptcy petition. We will also complete a proposed plan that we will ask the bankruptcy trustee to adopt in setting up your debt repayment plan. Remember, most of your debt will be paid off in amounts far less than their full value.

*You will need to attend a credit counseling course before you can file for bankruptcy.

*A First Meeting of Creditors Hearing will be held Redwood Falls in which you and your attorney must attend. The bankruptcy trustee will ask you questions about your income, expenses, debts, and assets. The trustee will review the plan to decide whether it is workable.

*If the trustee approves the plan, you need to begin making payments. You will continue making payments to the trustee throughout the length of the plan, either three years or five years. Once you have completed your obligations under the plan, the debts are discharged.

*You will need to take another class, called a ‘Financial Management class.” This must be completed before you make your last payment on the bankruptcy plan.

What is a Bankruptcy Trustee?  This is a lawyer who represents the interests of the creditors. It is his/her job to carefully review your economic situation to determine whether there are assets available to pay the creditors and whether the payment plan we propose is fair to the creditors. 

Do you ever need to appear in front of a judge?  Usually, not. The trustee is not a judge. You would only appear in front of a judge if there is an unusual circumstance such as the trustee won’t accept your plan, creditors appear to dispute the plan, or other similar issues.

What if I can’t make payments on my Chapter 13 plan? If you can’t make your payments, you may be allowed to convert your Chapter 13 bankruptcy into a Chapter 7 bankruptcy.

Herbert Kroon