The unique powers of even a simple Chapter 13 case are impressive. They allow you to reach goals that a “straight bankruptcy” simply can’t.
Some of the Simple Benefits of Chapter 13
Even in with a simple Chapter 13 case you can:
1) catch up on your unpaid mortgage payments, have up to 5 years to do so, while continuously being protected from foreclosure;
2) possibly “strip” off a second or third mortgage from your home’s title;
3) likely do a “cramdown” on your vehicle loan, reducing your monthly payments AND the total paid for your vehicle;
4) pay those income tax debts that can’t be discharged, without more interest and penalties, while being protected from tax collection;
5) catch up on child and/or spousal support while being protected from the extreme collection powers of support enforcement agencies; and
6) keep assets that a Chapter 7 trustee would take from you.
We covered the first two of these in our blog two weeks ago, and give you the rest of them today.
“Cramdown” on Your Vehicle Loan
You can do a “cramdown” under Chapter 13 if:
- your vehicle loan is more than 910 days old (about 2 and a half years), and
- you owe more on it than your vehicle is worth
- reduces the secured debt part of the debt to the amount to the vehicle’s value
- often lowers the interest rate
- stretches out the payments
- often significantly reduces the monthly payment
- the remaining unsecured portion of the debt is treated like your other “general unsecured” debts, which you pay only to the extent that you have any money to pay them, if at all
“Cramdown” often enables you to pay off your vehicle loan for thousands of dollars less.
Pay Income Tax While Being Protected
You can discharge—legally write off—some income taxes under Chapter 7 if they meet certain timing and other conditions. But otherwise—usually if they’re not old enough—you can’t discharge them. At that point you might be able to enter into an installment agreement with the IRS or the state to pay those remaining taxes. Or you could try to settle them through an IRS Offer in Compromise or similar procedure with the state.
But Chapter 13 provides what is often a much better alternative for dealing with these tax debts. It can handle all of your tax debts in one package, along with all your other debts. You make affordable payments on those taxes that are not being discharged. They’re affordable because the amount you pay is based on your budget instead of on what the taxing authorities demand.
This often means that even more urgent obligations can be paid ahead of the taxes. So you can usually cure the arrearage on a mortgage or vehicle loan before the taxes. Also, usually prior penalties do not have to be paid in full, and often are paid nothing or very little. Interest and penalties usually stop accruing once you file the Chapter 13 case. That alone can save you lots of money, enabling you to pay off your taxes faster. And very important, during your Chapter 13 case the IRS/state can’t continue taking any collection efforts against you, such as recording tax liens or levying on your wages or accounts. Then at the end of your successful Chapter 13 case you would be tax-free and debt-free.
Pay Unpaid Child/Spousal Support While Being Protected
Support collection methods can be extremely aggressive. Your ex-spouse and the support enforcement agencies can use tremendous powers against you if you fall behind. They have the usual capacity to garnish your wages and levy on your bank and credit union accounts. But they can usually to do so without needing to sue you because of the prior divorce judgment. It creates continuing authority to garnish and levy against you. They can also suspend your driver’s license. Most potentially devastating, after going through appropriate procedures they can also suspend any state-issues occupational or professional license, effectively shutting down your ability to work.
Chapter 13 can’t change your monthly child or spousal support obligation amount. Only your state domestic relations court which originally ordered the support can do that. Neither can Chapter 13 discharge (write off) any support debt or stop collection efforts on the REGULAR monthly support.
But what Chapter 13 CAN do which Chapter 7 can’t is to stop collection efforts for UNPAID support. It can force your ex-spouse/support enforcement agency to accept catch-up payments based on your actual ability to pay. Most importantly, filing Chapter 13 can stop all their super-aggressive collection procedures. You just need to make your regular support payments going forward, show how you’ll bring the support arrearage current in your court-approved plan, and then comply with what you’ve proposed.
Keep All Your Assets Even Those Not “Exempt”
Chapter 13 provides a great mechanism for keeping and protecting assets that you’d lose in a Chapter 7 case. These are assets which are not “exempt” and so you’d have to give them to the bankruptcy trustee. Your Chapter 13 plan just needs to have you pay enough extra to cover however much a Chapter 7 trustee hypothetically would have received from the sale of your non-exempt assets. You get to keep those otherwise unprotected assets by paying to do so. But you do this on terms based on your budget and ability to pay.