Checkett & Pauly, P.C.

Chapter 13 Basics

Many clients ask us about Chapter 13. They know Chapter 13 is a way to pay some or all of their bills, essentially a reorganization for the working man and woman.

However, for all the good intentions, Chapter 13 has its problems. It is more expensive, more complicated, and takes longer than the Chapter 7 bankruptcy, all a difficult recipe for people already in financial trouble. Attorney fees are more in Chapter 13 than in Chapter 7. Instead of taking a few months, the case goes on for three to as long as five years. You are not allowed to take on new credit while in Chapter 13 and have to get court permission to purchase a car or get any kind of loan.

All that said, Chapter 13 is a good alternative for people who find themselves in one of the following categories:

• You want to pay your bills. We hear often from people who have tried working through credit counseling firms, even the so-called non-profit organizations, and find that after paying for years they have gotten absolutely nowhere. The problem with the credit counseling companies is that in many cases the beginning payments go entirely to the counselor's fee and even after that, part of your remaining installments still go to the credit counselor and not to the credit card company. It is common for the credit card companies refuse to reduce interest while you are working with a counselor, all of which leads to the dilemma that people who are trying their best to pay their bills do not get any place. Chapter 13 stops the interest and the credit card companies have no choice but to go along with your payment plan.
• You have assets that would be lost in a Chapter 7. In a Chapter 13 bankruptcy you are entitled to keep certain exempt items. In Missouri that means $15,000 equity in a home, $1,000 for each person in automobile equity, unlimited amounts in pensions and retirement, and other items too numerous to mention. If you would lose some or all of these assets in a regular bankruptcy, a Chapter 13 will allow you to keep the assets, pay your creditors, and at the end of the case have all of your bills wiped out. Please read two other articles at http://www.cp-law.com/ "Missouri's Unlimited Bankruptcy Exemption" and "Missouri's Bankruptcy Exemptions."
• You have received a Chapter 7 discharge within the previous six years. You cannot file another Chapter 7 until at least six years has passed. However, you can file a Chapter 13, although it must be done in good faith, right after Chapter 7. In fact, there are some times when for strategic reasons we file a Chapter 13 immediately after Chapter 7 (known in the business as a "Chapter 20") to get our client very good results.
• You have a vehicle worth substantially less than what is against it. Under Chapter 13 you are allowed to keep a vehicle by paying its value, not necessarily the amount of the lien, over a term of up to five years at a low rate of interest. This can be a substantial advantage to people who are "upside down" on a vehicle loan.
• You have non-dischargeable tax debt. If you have more tax debt than you can pay and it cannot be wiped out in a regular bankruptcy proceeding, Chapter 13 is a good way to pay the taxes over five years without any penalty and hold off the tax collector.v
• You are behind on your home loan and want to keep your house. If you have had problems and have missed the loan installments on your home, you can catch up the payments over a period of time in Chapter 13 and still keep the house. Of course, while in Chapter 13, in addition to the catch-up payment, you must also stay current on your regular monthly home loan.

How to calculate Your Chapter 13 payment.

The next logical question is how much will you have to pay in Chapter 13. The plan payment will vary and is often a subject of dispute between the trustee and the attorneys at Checkett & Pauly. While there are a number of factors more complicated than we can discuss in this article, as a general idea, plan on the following:

1. Add up the total amount of the assets you would lose in Chapter 7. This is where it gets tricky. As we said, in Missouri you are entitled to $15,000 equity in a home, $1,000 for each bankruptcy debtor in a vehicle, and $1,000 in household goods. There are also some wild cards and a few other exemptions, but the homestead, the household goods, and the cars usually play the most important part. (See also the articles at http://www.cp-law.com/ on Missouri bankruptcy exemptions.)
2. Determine the higher of the amount you would lose in Chapter 7 against priority debts such as taxes or child support which must be paid in full in Chapter 13.
3. Factor in any past due payments on your home mortgage. Add to your arrearage the interest at the rate specified within the mortgage contract.
4. Determine the amount of your disposable income for at least three years. This is calculated by a worksheet we will file with the court showing all of your income and wage deductions, as applied to your regular monthly expenses.

Now after you have calculated all of that, add 10% to cover the fee that is going to be charged by the Chapter 13 trustee (you don't work for free and neither does he).

Now you take the final number and divide by as short as 36 or as long as 60 payments.

In Conclusion.

When a potential client visits us at Checkett & Pauly, we always discuss both Chapter 7 and Chapter 13, and help you compare the pros and cons of each. Hopefully, this article can help you consider Chapter 13 as an important alternative before your first appointment with Checkett & Pauly.