In essence, Chapter 13 bankruptcy is a repayment plan. There are many reasons why you may choose to file for Chapter 13 bankruptcy, as well as many benefits associated with doing so. This section is concerned with one of those benefits: the opportunity to save your home.
For homeowners who have defaulted on their mortgage and meet certain income requirements, Chapter 13 bankruptcy provides the best method for saving their home. The bankruptcy code provides special protection to residential mortgage companies. Namely, Chapter 13 bankruptcy cannot modify the rights of a claim secured only by a security interest in real property that is the debtor’s principal residence. However, it can provide for the curing of the default.
To elaborate, Chapter 13 bankruptcy allows you to pay mortgage arrears over the course of up to five years. The mortgage company’s claim will include all past due payments, plus late fees and all other costs incurred by the mortgage company. From the start of the default up to a judicial (sheriff) sale, add-ons accrue. Once a foreclosure has been filed, the additional costs are estimated to be approximately $3,500. You can file for Chapter 13 bankruptcy any time before the mortgagee has a judicial sale, but it goes without saying that the sooner the better.
The primary test for you as the homeowner is threefold: can you pay the current monthly mortgage payments after the case is filed, can you pay the trustee a monthly payment sufficient to cure the default, and will you have a sufficient amount left over to pay for everyday living expenses? To be eligible to file for Chapter 13 bankruptcy, you must have a regular source of income. The term “regular income” can include multiple sources, the most common of which is from an employer. Other sources include Social Security, unemployment compensation, self-employment income, and rents. Supplements to “regular income” can include a non-filing spouse income, and even contributions from family members and/or roommates.
There are certainly other requirements, including the following:
- You must list all forms of income related to the household.
- You must provide proof of income for the preceding 60 days; if you just started a job, then an affidavit should be sufficient.
- You must have filed federal income taxes for the preceding four years; if you were not required to file for one or more of those years, then the requirement can be satisfied by an affidavit.
- You must list all debts. This is sometimes a bone of contention with clients because they do not want to list certain debts. However, it is not an option to omit any source of debt.
- You will need to consult with a lawyer in order to determine the true amount of the mortgage default, as this is something which most people underestimate. Be sure to bring every scrap of paper you’ve received from the mortgagee and its lawyers. If a foreclosure has been filed, bring the foreclosure complaint.
- You must ensure that all assets are scheduled. The market value of the house must be listed; this is important as it will determine what dividend will be paid to unsecured debts. In about 90 percent of Chapter 13 bankruptcy cases, the dividend to unsecured creditors is 10 percent or less.
- The schedules you complete must include an income statement and budget.
- You must list car notes. While car notes can sometimes continue to be paid directly rather than through payments to the Chapter 13 trustee, this isn’t recommended.
- You must complete the means test. Your lawyer will discuss the importance of this test and how to complete it.
- Before filing for Chapter 13 bankruptcy, you must obtain a certificate indicating that you completed credit counseling. The cost of the certificate is about $10. Any case filed without a certificate of credit counseling will be automatically dismissed.
The above list is not exhaustive. An experienced Chapter 13 bankruptcy attorney can ensure that the process is made as efficient and simple as possible.
Once 20 to 40 days have passed since the filing of the case, you will be required to attend a meeting with the Chapter 13 trustee; your lawyer will accompany you to this meeting. Chapter 13 bankruptcy payments must start within 30 days. If you are on “payroll control” and there is a delay in starting the payroll deductions, then you must make the payments directly.
If everything has been laid out properly and payments to the trustee start right away, then the Chapter 13 bankruptcy case should be confirmed without delay. Upon completion of the Chapter 13 bankruptcy case, the mortgage will be totally current and all or most of the other debts will be discharged, and your home will be saved.
ADDITIONAL INFORMATION ON CHAPTER 13 BANKRUPTCY
WHEN SHOULD YOU FILE WITH YOUR SPOUSE, AND WHEN SHOULD YOU NOT?
When a home is owned jointly by a married couple, it must be determined whether the case should be filed jointly or only in one name. The decision will depend on the facts and circumstances of the case at hand. For example, if one spouse enters the marriage with debts and a poor credit score, and the other spouse is debt-free and has a good credit score, then the indebted spouse may choose to file separately so as to keep their debt-free spouse out of bankruptcy court and leave their good credit score untouched.
If spouses have a significant amount of joint debt, then filing together might make sense, as each spouse will be equally responsible for the debt regardless of whether one or both spouses file. In some states, Chapter 13 bankruptcy attorneys will recommend that spouses who jointly own property and debt file for bankruptcy jointly. However, in Chicago, the idea of “tenancy by the entirety” under Illinois law applies. In essence, this is a type of real estate ownership that is only available to married couples and provides a means for protecting the homestead. If a spouse files for bankruptcy alone, then the jointly-owned homestead might be removed altogether as a factor in the bankruptcy case. When possible, the Chapter 13 bankruptcy attorneys at Robert J. Adams & Associates in Chicago, IL will encourage couples to file for Chapter 13 bankruptcy in only one name.
UNDERSTANDING CHAPTER 13 BANKRUPTCY REPAYMENT PLANS
Through Chapter 13 bankruptcy, your debt can be paid over the course of three to five years, depending on the repayment plan. But what’s involved in the creation of these plans, and how do you go about getting one to begin with?
It may sound simple, but the process of creating a Chapter 13 bankruptcy repayment plan can be complicated. For starters, all of your debts must be characterized into groups and considered separately, which will require you to have a thorough understanding of the differences between priority debts, secured debts, and unsecured debts, as well as the exceptions that sometimes apply, and which debts might never have to be paid.
If you attempt to carry out the necessary calculations and devise a plan by yourself, be sure to remember that the plan you create will have to be approved by your creditors and a judge; if your plan is rejected, you will have lost a considerable amount of time and effort, and will have to give it another go—potentially without even knowing how to fix the problem. The other—and potentially even worse—consequence of creating a repayment plan on your own is that you could put forth a plan that is approved, but that you ultimately cannot adhere to. If you become unable to make the required payments under your repayment plan, then your bankruptcy case could be dismissed by the courts or changed to a Chapter 7 bankruptcy case, which would put you at risk of losing your home and other assets.
A Chapter 13 bankruptcy attorney in Chicago will not only be able to help you structure a plan that’s financially feasible for you and maximizes the benefits of Chapter 13 bankruptcy, but also ensure that your plan meets the requirements for approval—meaning the courts and creditors will accept your plan, and you’ll be that much closer to living a financially stable and secure life in Chicago, IL.
WHAT DOES IT MEAN WHEN DEBTS ARE “CRAMMED DOWN” IN A CHAPTER 13 BANKRUPTCY CASE?
When a judge allows for certain debts to be “crammed down” in Chapter 13 bankruptcy, it means that they are allowing for the reduction of secured debts, such as a home or auto loan. More specifically, the debt will be reduced by the difference between the total amount owed on the loan and the actual market value of the asset behind the loan.
For example, if you bought a car for $21,000 using a five-year auto loan totaling $26,250, with monthly payments of $437.50, then you would still owe $6,250 on the loan after making every payment for four years. If the market value of your car at the time of applying for Chapter 13 bankruptcy is only $3,000, and if a judge were to “cram down” this debt, then you would only be required to pay the market value of your car. This means that instead of paying $6,250, you would only be required to pay $3,000.
This can be a great tool for saving money and putting it toward other debts which can’t be reduced. However, there are several restrictions in terms of what can be “crammed down” in Chapter 13 bankruptcy. To determine whether a judge may agree to cram down your secured debts, schedule a free consultation with the attorneys at Robert J. Adams & Associates in Chicago, IL.
WHAT HAPPENS IF YOU RECEIVE AN INHERITANCE DURING CHAPTER 13 BANKRUPTCY?
Receiving an inheritance while in the process of Chapter 13 bankruptcy could result in an increase in your monthly payments under the established repayment plan. The primary factor in determining how much of an inheritance will be factored into the recalculation of monthly payments is when the inheritance was received. In general, if it was received within 180 days of filing for Chapter 13 bankruptcy, then at minimum you would have to pay the same amount as creditors would be entitled if it were a Chapter 7 bankruptcy, which is the value of the nonexempt portion of inheritance. If an inheritance was received more than 180 days after filing for Chapter 13 bankruptcy, then it is possible that you would be able to keep the inheritance. This determination is made at the local level, which means the same case might be handled differently in one city as compared to another. Contact Attorney Robert Adams in Chicago, IL for a review of your specific case and a good idea as to whether or not you will lose your inheritance in the bankruptcy.
DON’T WAIT ANY LONGER: TALK TO THE CHAPTER 13 BANKRUPTCY EXPERTS AT ROBERT J. ADAMS & ASSOCIATES
For over three decades, the attorneys at Robert J. Adams & Associates have helped distressed homeowners in Chicago, IL navigate the complexities of the Chapter 13 bankruptcy process. If you are in over your head in debt but do not want to lose your home or other assets, you may find the perfect solution through Chapter 13 bankruptcy. If you are unsure as to whether you are eligible to apply for Chapter 13 bankruptcy or what assets you would lose if you were to file for Chapter 7 bankruptcy instead, contact the people who specialize in these matters—the attorneys at Robert J. Adams & Associates in Chicago, IL. Don’t hesitate to call them up and schedule your free consultation today. You’ll walk away equipped with the information you need in order to determine the best plan of action and how to take the first step toward making it happen.
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