A Chapter 13 Bankruptcy is often referred to as a “reorganization” for consumer debtors. It is typically used by people who either do not qualify under Chapter 7 because their incomes are too high or those who are in fear of losing their homes to foreclosure because they are several months behind on their mortgages. There are some who are current on their mortgage and would qualify under Chapter 7but choose a Chapter 13 Bankruptcy to eliminate a second mortgage if possible.

Under a Chapter 13 Bankruptcy you are placed into a Court supervised repayment plan. The monthly payment is based upon what you can afford after deducting allowed expenses from your income. In most cases, the Chapter 13 Plan can last no less than 3 years and no more than 5 years. Many people do not pay off all of their debts during the Chapter 13 Plan repayment period. They usually only pay pennies on the dollar for most common debts and any remaining balance is wiped out (similar to a Chapter 7) upon completion of the plan.

Chapter 13 Bankruptcy Benefits

Repayment of Past Due Mortgage Payments (also called “arrears”)

  • Arrears are repaid through Chapter 13 Plan (over 3 to 5-year period)
  • Mortgage Holder cannot foreclose as long as person is current with both the Chapter 13 Plan payment and current mortgage payment

Eliminate Your Second Mortgage

  • If the current value of your home at the time when you file a Chapter 13 Bankruptcy is less than you owe on your 1st Mortgage, then you can wipe out your 2nd Mortgage upon successful completion of the Chapter 13 Plan

Pay Only Pennies on the Dollar for Most Commons Debts (like credit cards, personal loans, older taxes, etc.)

  • Chapter 13 repayment plan amount is based upon your ability to pay (i.e., an amount you can afford)
  • Chapter 13 Plan period is 3 – 5 years with any remaining balance wiped out when the Plan is completed

Chapter 13 Drawbacks

You Are on a Repayment Plan

  • You must make regular monthly payments which are based upon your ability to pay
  • You must commit all of your available “disposable income” (what’s left over after taking into account your necessary monthly expenses) to the plan

It’s a Much Longer Process

  • Chapter 13 Plan must be at least 3 years and not more than 5 years

Attorney’s Fees Are Higher

  • Attorney’s fees can be approximately double that of a Chapter 7 Bankruptcy
  • It’s a more complicated process
  • Your Chapter 13 Bankruptcy Attorney is with you for the entire 3-to 5-year period

There Are Limits to the Amount of Debt You Have for a Chapter 13

  • Unsecured debts (credit cards, personal loans, student loans, taxes, etc.) can be no more than $394,725.00
  • Secured Debts (home loans, car loans, etc.) can be no more than $1,184,200

The length of the Chapter 13 Plan period and amount you may need to pay under the plan varies person to person. Factors that affect the plan period and plan amount include income, size of household, allowed expenses and how that information is figured into the “means test.”

What is “Means Testing?”

Means testing was started with the 2005 amendments to the Bankruptcy Code. It was a formula designed to provide a more “mechanical” approach to determine who qualified to file under Chapter 7 as opposed to having to file under Chapter 13 and have a repayment plan. For those filing under Chapter 13, it also had the effect of determining how long the minimum term of their plan had to be and the amount of the payment under the plan. The idea was to provide a more strict, uniform approach. Unfortunately, it hasn’t always worked out that way and many exceptions to its strict use have been carved out. As your bankruptcy attorney, Contant Law will review your income and expenses to determine how it will affect you.

The income we look at under “means testing” is your gross household income for the most recent 6 months. Because we look at the most recent 6 months, this rule is often used to the benefit of seasonal workers (many labor union jobs, teachers, landscapers, construction workers, etc.), whose higher level of income may not otherwise allow them to qualify to file under Chapter 7. The income we look at includes:

  • Income for both spouses from most sources, even if only one of them is filing for bankruptcy (we don’t count social security and some other less common types of income)
  • All regular contributions to household expenses (i.e., room and board received from children or roommates, contributions from other family not living with you, etc.)

Your income is then compared to the median level of income in your state based upon the number of people in your household. A “household member” does not have to be a relative or a dependent of yours (i.e., roommates count towards the household size). Below is a chart showing the current median income levels for different household sizes in Massachusetts as of April 1, 2020:

1 Person $67,119
2 People $84,125
3 People $108,130
4 People $134,418
Over 4 People +$9,000 per person

What Does it Mean for Person filing under Chapter 13?

If your household income is greater than the median level of income for the size of your household, then your repayment plan period is required to be 5 years. If your household income is lower than the median income, then your plan period can be as low as 3 years. Note that some people whose income is lower than the median may still elect for a 5-year repayment plan period. This is usually where they are significantly behind on their mortgages and need this additional time to get caught up.

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