Chapter 13, entitled Adjustment of Debts of an Individual with Regular Income or the "payback bankruptcy",
is designed for an individual debtor who has a regular source of income.
You may have significant equity in your home, motor vehicle or other assets and you can afford to repay a percentage of your debt over
a period of a minimum of three to a maximum of five years. You can keep all your stuff but have to make payments. A chapter 13 also
can be utilized to pay your mortgage arrears slowly while keeping current payments after filing. If you buy, sell, refinance, transfer
or have any transactions over $500, we must have permission of the court to act. An astute bankruptcy lawyer will figure out the
“Chapter 7 Value”, or what was left in the pot of a chapter 7 that you would have to pay the trustee, and put you into a chapter 13 case
long enough to pay that amount, and then convert you into a chapter 7.
When questioned by the chapter 7 trustee, he will see that you have already paid the chapter 13 trustee the amount that you would have had
to pay him in a chapter 7 case. Otherwise, if you just did the chapter 7 bankruptcy from the get-go, then you would have to scramble to pay
the chapter 7 trustee.
For example, if you inherited your dad’s 1923 Jewett Roadster motor vehicle, you may have had to pay the trustee $20,000 if you used your
motor vehicle exemption on another vehicle. If you are filing a bankruptcy, you probably don’t have that amount of cash lying around. If
you had three years to pay that back, your cost would be $20,000 divided by 36 months plus 5.5% for the chapter trustee’s administrative
fee. It’s kind of like paying 5.5% to keep your dad’s car while you pay off the value of the Jewett Roadster.
Chapter 13 is often preferable to chapter 7 because it enables you to propose a “plan” to repay creditors over three to five years.
In certain situations, you can cram down interest rates and balances on motor vehicles paid within the plan, avoid a second or third mortgage that
is unsecured, or get caught up on your mortgage arrears. Chapter 13 is also used by consumers who do not qualify for chapter 7 relief under the
At a confirmation hearing, the court either approves or disapproves the debtor’s repayment plan, depending on whether it meets the
Bankruptcy Code’s requirements for confirmation. You want a lawyer to fight for you to get your plan approved.
Fights are with the trustee and the secured creditors generally.
Chapter 13 is very different from chapter 7 since the chapter 13 debtor usually remains in possession of the property of the estate and
makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan. Unlike chapter 7, the
debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is
received. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also
somewhat broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7 such as property settlements from divorce
cases. So if you got a raw deal on your divorce, don’t file a chapter 7. A man got literally thrown into jail for a month because he could not
pay the exorbitant amount that his divorce attorney strong-armed him into accepting. It was a property settlement that could have been paid as
an unsecured debt in a chapter 13.
What can you keep? Stuff that is exempt.
As of January 2014, the standard maximum exemptions in Ohio include the following:
- no limit: Pension that you “cannot touch” without severe penalty prior to retirement (ERISA-qualified but you must provide a
“Summary Plan Description” obtained from your human resource person).
- no limit: Lump sum workers’ compensation and Social Security claims as long as these amounts are not co-mingled with other
funds and lose their identity. These amounts may be indicia that you can afford to fund a chapter 13 plan so disclose any claims to your lawyer
as soon as possible. Remember, you can be in a chapter 13 repayment plan at a minimum amount, receive notice of settlement or award,
convert to a chapter 7 if your circumstances permit, and then add in any new debt incurred in good faith for the duration of the chapter 13.
For example, you could file a claim for social security disability benefits and your average wait for approval in Ohio is two years. You have anxiety aggravated by the constant harassment of creditors calling you and cannot afford to pay them individually. You do not qualify for Medicaid as a disabled person yet. You have to seek medical treatment or you could die. By filing a chapter 13, you could pay back a very low percentage to all of your creditors in one easy payment that includes your attorney’s fees. And you manage not to have a nervous breakdown!
The bankruptcy permits you to incur additional medical debt that can later be discharged under the proper circumstances. Then you can pay back your medical providers if you so choose at your own pace without the anxiety.
- $132,900: equity per person in the deed to the house or mobile home so a husband and wife jointly filing and on title would be $265,800. A couple may have paid off their mortgage but have been living on credit cards for necessities of life, robbing Peter to pay Paul as the saying goes. Now they can discharge their credit card debt and not lose their home with equity of $265,800 not including the mortgage. This is a big deal because many of my clients have “bailed out” their children and grandchildren for years. This homestead exemption is not typical in other states which are noticeably smaller.
- $12,250: in household goods (garage sale value of everything in your home or apartment) and any one item can be valued $575
- $23,000: permanent damage in a personal injury case per person injured
- $3,775: equity per person in title on an automobile; husband and wife on one title $7,550
- $2,325: tools of the trade. If you are a carpenter: your saws, hammer, nail gun, etc. as priced on Craig’s list or garage sale. If you are a photographer: your cameras, lenses, lights, and screen drops.
- $1,550: in jewelry (resale value). Wedding rings are exempt (or ok to keep) under the new federal law-Ohio has yet to adopt this! Just because you did not pay for an item does not mean anything. If Grandma gives you a ring for your birthday, that is significant because it is separate property in divorce law but you still own it under bankruptcy law. So don’t bother arguing that it is a gift. It is part of the pot.
- $1,225: per person wildcard/debtor’s choice of whatever you want; jointly filed, $2,450 if both own an asset. This exemption can be applied towards your income tax refund, motor vehicle, whole life insurance value, or other asset. If you have a motor vehicle in both of your names, then you can have the double motor vehicle and double wild card exemption. You simply cannot change the titling just before you file the bankruptcy though. Then you would be a hog.
- $450: per person in cash and on total accounts: cash on hand, checking, savings, income tax refund, etc. By the way, you are also entitled to keep certain tax refund credits such as the child care credit.