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Chapter 13 is often called a debt consolidation or Wage Earner Plan. Essentially a repayment plan is created based upon your budget. It operates somewhat like consumer credit counseling, with several major exceptions.
A Chapter 13 Plan is generally binding on creditors, rather than voluntary. The plan will suspend interest on unsecured debts and may also provide for less than full payment of them. A Chapter 13 can bind agencies, such as the Department of Licensing and the I.R.S., while the plan is in effect.
A 100% repayment plan can run for as few as several months up to a maximum of 60 months.
A Best Efforts plan can run from 36 to 60 months. A Best Efforts plan provides for less than full payment to unsecured creditors, but represents your best effort to repay your creditors, even if the unsecured creditors receive virtually nothing from the plan. When the plan is completed, with certain exceptions, these debts are discharged or eliminated, even though nothing was paid on them.
There are several reasons to choose Chapter 13 over Chapter 7:
- Prior Chapter 7: A chapter 7 may only be filed once every 8 years. If you filed Chapter 7 less than 8 years ago, your only recourse is a Chapter 13. Even then, you can only get a discharge of your debts if your prior Chapter 7 was filed more than 4 years ago.
- Non-Dischargeable Debts: If your most troublesome debts are non-dischargeable debts, Chapter 13 may be the best alternative. Some of these debts include: back taxes, student loans, back child support, court fines, and criminal restitution. Certain other debts may fall into this category. Some of these will be discharged when the ase is completed. Others, such as back child support, criminal fines and restitution and student loans, will survive unless paid in full in the Plan. Priority tax debts normally must be paid in full over the life of the Plan.
- At-Risk Property: If you have property that cannot be exempted or protected under the bankruptcy rules, you may choose Chapter 13 as a means of protecting the items. The creditors must receive as much from the Chapter 13 plan as they would receive if you were forced to sell the property under Chapter 7. The amount of property you can protect is discussed in the Chapter 7 section.
The other, and more common, at-risk property is foreclosure pending property. Chapter 13 can stop a pending foreclosure or repossession by providing that the back payments can be cured within a reasonable time during the life of the plan.
- Excess Income: If you have excess income, after deducting your ordinary living expenses, you may choose to repay all or part of your debts with a Chapter 13. If your average income for the previous six months exceeds the average for your size family, you may be required to file a 60 month Chapter 13.
This is commonly referred to as the "Means Test." The following website has a quick calculator to get you started: www.bestcase.com.
CMI is your current monthly income. The test has 3 parts. The above is the first part. If your income exceeds the average, we move to the second part or the test, which allows for various deductions, such as taxes, mortgage payments, medical expenses, daycare, etc. If your Disposable Monthly Income (the amount left over after the deductions) is more than $150, you will probably need to consider a Chapter 13.