About Chapter 13
Under Chapter 13 debtors propose a repayment plan to make payments to creditors over a period of three to five years. During this time the law forbids creditors from starting or continuing collection efforts. A Chapter 13 is designed to restructure and reorganize your debts into one affordable monthly payment. The payment is affordable because it is calculated based off the amount of disposable income you have. Disposable income is the income you have left over after subtracting your income from the amount of your reasonable living expenses.
Chapter 13 offers individuals a number of advantages over straight liquidation under Chapter 7. Perhaps most significantly, Chapter 13 offers individuals an opportunity to save their homes from foreclosure or cars from repossession. By filing under this chapter, individuals can stop foreclosure proceedings and/or repossessions and are allowed to cure delinquent payments over time. Another advantage of Chapter 13 is that it allows individuals to reorganize secured debts and extend them over the life of the Chapter 13 plan which may lower the payments. Chapter 13 also allows you to adjust the interest rate down to a reasonable rate on all secured debts except a mortgage. Chapter 13 has a special provision that protects third parties who are liable with the debtor. This provision can be used to protect co-signers. Finally, Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a Chapter 13 trustee who then distributes payments to creditors. Individuals do not have direct contact with creditors while under Chapter 13 protection.
As to secured loans, you can choose to either keep the collateral on a secured loan or you can surrender it. If you choose to keep the collateral, the debt will have to be paid back one of two ways. If the debt is large enough that it cannot be practically paid back during the life of the plan (like a mortgage), the loan will be paid back as a continuing debt. This means the loan will be brought current and paid regularly during your plan and at the end of the Chapter 13 you resume paying the loan at the regular monthly rate. The other way is to pay the secured debt in full during the life of the plan. If you are buying an automobile, for example, you would typically pay back the debt over the length of your Chapter 13 plan (which can last up to five years). If you have been buying an automobile for more than 2.5 years, you are generally allowed to "cram down" the debt to the current value of the automobile instead of having to pay back the entire balance.
Whether or not your unsecured creditors are paid in full in a Chapter 13 depends on how much you are able to afford to pay. Generally, bankruptcy law requires that you commit your disposable income for a minimum of three years or no more than five. Again, disposable income is defined as the difference between your income and your reasonable living expenses. If there are not sufficient funds to pay the unsecured, they will receive only a percentage of what is owed them or possibly nothing at all. For many people, this means they are able to discharge out all or most of their unsecured debts similar to the discharge in a Chapter 7 while still being able to reorganize and keep secured debts.
Chapter 13 is a fair way to pay your creditors because creditors get paid through an organized plan which is based on what you can actually afford. Creditors have to accept the amount you can afford to pay and cannot call and try to harass you into paying their debt in full over others. It is fair to you because it is structured uniquely to your situation to ensure your payment is affordable.
Let Us Show You How We Can Help
The Harris Law Firm is experienced in helping Arkansans file Chapter 13. We have over 25 years of legal experience. Contact us at the Harris Law Firm—call 501-372-6985 or set an appointment online. We offer free consultation. There is never a fee unless you decide to file.
A Chapter 13 bankruptcy is also called a wage earner's plan. It enables individuals with regular income to create a plan to repay all or part of their debts.