Chapter 13 Bankruptcy is not just a method to stop foreclosure or wipe out credit card and other debt. Sure, filing a Chapter 13 can do that but it is a powerful financial tool that can do so much more! It can be used to restructure debts for a period of up to 5 years and provide a way for a debtor to control their debt load without sacrificing a decent standard of living. A debtor is under the protection of the court during the Chapter 13 period. The debtor’s personal & real property, pay, and bank accounts are all protected (with very limited exceptions).
Here are 10 reasons why Chapter 13 is a financial powerhouse that most are unaware of:
1. Any statute of limitations is extended by 2 years by filing bankruptcy as long as the bankruptcy filing was completed before the original statute of limitations expired. If you have suffered personal injury for example, this extension of time to seek address could be extremely beneficial.
2. If you have been ordered by a court to pay criminal restitution, Chapter 13 can be used to pay this debt out over up to a 5 year period. This extension can make the payments a lot lower than what the court originally established. And if the restitution is a large amount that for example could not be paid in full over 5 years in a Chapter 13, the debtor could do 2 or more Chapter 13 cases back to back. Repayment could then be extended out over a longer period than the 5 years allowed in the single Chapter 13.
3. Federal and State income taxes can be discharged in a Chapter 13 as long as they meet the following four basic criteria;
a) The due date for the tax return was at least 3 years prior to filing for bankruptcy;
b) The tax return must have been filed at least 2 years before filing the bankruptcy;
c) The taxes must have been assessed at least 240 days prior to filing bankruptcy; and d) The taxpayer is not guilty of tax evasion and the tax return is not fraudulent.
For example, 2009 taxes could not yet be discharged because they were not due until April 2010, and would not be 3 years old until 2013.
Taxes that do not fit the criteria and therefore cannot be discharged can however be paid out over the Chapter 13 period. That is a benefit not only for possible lower payments, but because paying these taxes through the Chapter 13 stops the penalties & interest that would normally continue to accrue!
4. Chapter 13 bankruptcy can be used to pay past due child support, alimony, maintenance, and other domestic support obligations over a 5 year period and can protect the debtor from being incarcerated for previous failure to pay. In addition to taking care of the past due support, the Chapter 13 will provide for future and current payments. Once the Chapter 13 is confirmed by the court, if the debtor’s previous failure to pay has also brought on one or more of these penalties: “the withholding, suspension, or restriction of a driver’s license, a professional or occupational license, or a recreational license, or the reporting of overdue support to a consumer reporting agency, or the interception of a tax refund”, the continuation of any of these penalties would be in violation of the confirmed plan and the creditor could be subjected to sanctions if continuing this activity.
5. Property settlement agreements and obligations are not dischargeable in a Chapter 7 but can be discharged in a Chapter 13.
6. Debts as a result of willful and malicious injury to property are not discharged in a Chapter 7 but can be discharged in a Chapter 13. If as a result of willful and malicious injury to a person, they are not discharged in a Chapter 7 but can be discharged in a Chapter 13, but the Chapter 13 must be filed before the state court action has gone to judgment.
7. Chapter 13 bankruptcy provides a way to stabilize, decrease, or even restructure student loan payments. The payments can be set up to pay the loan in full, or pay a % of the monthly payment, or to pay nothing at all during the Chapter 13 period. If the loan is not paid in full during the Chapter 13, it will still be waiting on the debtor at the end of the bankruptcy. Interest will still be accruing during the bankruptcy. But, during the Chapter 13 the debtor can wipe out other debts that will free up funds to use for the student loan payments. As well, if the loans are too large to pay in full over 5 years in a single Chapter 13, the debtor could do 2 or more Chapter 13 cases back to back and remain under the protection of the court from garnishment, seizure of bank accounts, and other such actions.
8. All secured debts (like cars, trucks, furniture loans, etc) can be stretched out in a Chapter 13, which will lower the monthly payment. Not only that, but if the secured debt was purchased more than 1-2.5 years (different types of secured debt have different age criteria) prior to filing Chapter 13 the debt can be “crammed down” and the debtor pay for it at the current value, stretched out, which would lower the amount owed and the payments even more. Another benefit to consider is that vehicles which are in the debtor’s name, but used either by someone else in the family or for business, can be paid for based on their current value, no matter when they were purchased. Secured debt interest rate is only 7 % in Chapter 13. And one last thing, co-signers, co-debtors and others that may be liable for the secured debts are also protected by the Chapter 13, even though they did not file bankruptcy.
9. You may be aware that the Chapter 13 bankruptcy stops foreclosure and allows any past due amount to be paid back over the 3-5 year Chapter 13 period. But most are not aware that if a homeowner has a 1st & 2nd mortgage and the property is worth less than the amount owed on the 1st mortgage, that the 2nd mortgage can be “stripped off” and completely wiped out in a Chapter 13. As well, after stopping the foreclosure, law suits for predatory lending, predatory servicing, and other types of claims against the mortgage company and/or mortgage servicer can be done within the Chapter 13. A lawsuit against any creditor or other defendant done within a bankruptcy proceeding is called an Adversary Proceeding. The bankruptcy judge conducts the proceeding and it is governed by the Federal Rules, Bankruptcy Rules, and Local Court Rules. Process is served by regular mail and the debtor pays no filing fees. It can prove more beneficiary to the debtor to address law suits within the bankruptcy.
10. As long as the bankruptcy was filed before the creditor has sold or disposed of the collateral, vehicles and other personal property that have been repossessed can be recovered by filing Chapter 13.
There are many, many more things that a Chapter 13 bankruptcy can do to address the various financial needs of someone, but hopefully these 10 have shed some light on why a Chapter 13 is truly a financial “Super Tool”.
Disclaimer: This blog is intended as general information purposes only, and is not a substitute for legal advice. Anyone with a legal problem should consult a lawyer immediately.