What Are the Benefits of Chapter 13 Wage Earner Plan?
Although most folks looking for relief from overwhelming debt would prefer the “quick and dirty” Chapter 7 discharge, there are several reasons why filing under Chapter 13 and making payments for 3-5 years might be preferable. Of course, those households with over-the-median income will likely have to file a Wage Earner Plan anyway and may not have a choice. But there are options under Chapter 13 that are not available in Chapter 7. Even those who indeed qualify for a 7 may find they are better served by taking a closer look at the benefits of a 13.
Catching up on a mortgage arrearage
Popular with many families facing foreclosure, especially those with a sheriff sale right around the corner, is the Chapter 13 feature that allows both an immediate halt to the foreclosure case (along with a canceling of any sale) and an opportunity to pay down the accumulated arrearage by spreading proportional payments over the next five years. This can be an important and vital lifeline in cases where someone has suffered a temporary hardship, like a job loss or unexpected medical procedure, and just wants to “get back in the saddle” by catching up payments over time.
Plan payments must be affordable
Many people presume that monthly payments made to the Chapter 13 Trustee will be larger if the level of debt is greater. Nothing could be further from the truth! In our experience, most of the parties involved in the process of agreeing on a Wage Earner Plan would prefer that a debtor be able to make the monthly payments comfortably and not be under so much strain with budget constraints that they eventually give up and pull out of bankruptcy.
Shave off second mortgage
Unlike a liquidation where underwater mortgage interests remain on a residence post discharge, a Chapter 13 case offers an opportunity to sever a second mortgage from the property and discharge that obligation completely. The central issue in such a move is whether the second position is indeed fully unsecured by the house. A valuation must be undertaken by the attorney and then presented to the Bankruptcy Court in order to support the request for this special relief.
Reduce car payments
Most cars and trucks bought on credit carry a running balance that is higher than the value of the vehicle. You know the old saw, “The new car loses $800 in value by just driving it off the lot.” As a result, eventually trading in this vital means of transportation usually involves placing some of that extra debt into the next purchase. But Chapter 13 can resolve this problem.
In a Wage Earner Plan, you may be able to undertake a “cramdown” of the loan and thereby reduce the balance to the value of the vehicle. You can accomplish this in a Chapter 7 through the use of a redemption loan. However, that requires qualification with a lender. In a Chapter 13 bankruptcy, you need not take this route. Your attorney can file a motion to value the collateral and ensure that the remaining balance is cleared to the extent your other unsecured debts are discharged. Pretty nifty.
There is one caveat. The vehicle loan you are adjusting cannot be purchased within the 910 days (about 2 ½ years) prior to the filing of the bankruptcy. This limitation is to prevent folks from gaming the system. Otherwise, you could purchase a new vehicle with a good-faith lender and then turn around. Then you could reduce the balance immediately through bankruptcy.
Manage tax debt
Spending time without a job, losing a business, suffering a major medical event or experiencing family loss can make it difficult to keep up with tax obligations. A Chapter 13 plan can be used to keep the taxing authority at bay (“talk to the hand, Mr. Tax Man”) and allow you to catch up over an extended period of time. The IRS usually gives taxpayers only 12 months to satisfy their tax obligations. Bankruptcy can extend that period to 60 months.
As soon as you file bankruptcy, all collection efforts must cease. It’s the law and it’s automatic. No one is permitted to continue to request payment or seize any assets. And that includes your car, truck or motorcycle. Repossession of any vehicle after a petition is filed is a violation of the automatic stay. It may thus earn the company a big smack-down by the Court.
Not only will the repo stop, but your Chapter 13 will provide for the resolution of any amounts owed in back payments. The arrearage will be paid in increments over the life of the Plan at a measly interest rate of 0 percent!
Student loans are included
We’ve heard a lot about how student debt is out of control and that people are drowning in it. We’ve also heard about threats of default and seizure of assets to satisfy those loans. Like with taxes, you can use a Chapter 13 to keep the collectors at arm’s length. It can also provide some payment through the Plan.
Unfortunately, full discharge of these obligations is very difficult and can be expensive at this time. However, an attorney should undertake an analysis of each case and explore non-bankruptcy solutions or programs. In the meantime, a 13 can provide at least temporary relief from any voracious government collectors and their attorneys.
Co-signors can’t be pursued
A common concern among clients who have had their parents or others co-sign for their loans is that bankruptcy will mean that lenders will immediately pursue the co-signors upon the filing of the petition. A federal statute, 11 U.S. Code § 1301, provides for a stay of any such action against a co-debtor. So as long as you pay into your Chapter 13 plan according to its terms, the law will protect any co-obligor from any unexpected collection activity by the lender.
As a side note, the co-debtor stay applies only to consumer debts. It does not cover any business or other non-consumer obligations.
In a Chapter 7, a debtor receives a discharge. However, in a 13, you get what people often refer to as a “super” discharge. In neither case can a debtor discharge:
- Child and parental support
- Criminal fines and restitution
- Damage awards caused by drunk driving
- Liabilities for theft, embezzlement or breach of fiduciary duty
- Debts incurred through fraud or false financial statements
- Most student loans
- Most tax debts
- Obligations arising from the willful and malicious injury to other persons
However, debts that are dischargeable in a 13 but not a 7 are:
- Civil fines and penalties
- Divorce decree debts
- Loans to pay non-dischargeable federal taxes
- Welfare repayment directives
- Obligations arising from the willful and malicious injury to property
So if any debt on the latter list is substantial, your attorney would do well to consider a 13 – even if you qualify for a 7.
Contact Benson Law Firm Today
For more information about the benefits of a Chapter 13 wage earner plan, contact the Benson Law Firm today.