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Chapter 13 Bankruptcy

Chapter 13 bankruptcy protection can be a really viable solution for someone who wants to keep all of his or her property regardless of whether its "exempt" under Florida law and regardless of the value of the property. Chapter 13 is essentially a tool for restructuring your payment obligations and paying debts over time. In some cases, it even allows the debtor to reduce the amount owned on certain secured debts to the value of the property securing the debt - the ability to do this is commonly referred to as a "cramdown" or "lien stripping" or "lien avoidance."

Basically, Chapter 13 requires you to submit a repayment plan that shows that you have the ability to pay all (100%) of your "priority debts" and stay current on payment to your "secured creditors" over the life of the plan. Priority debts include child support and alimony obligations, many taxes, and arrearages on your mortgage(s) and "secured" debt. Secured debt is debt owed to creditors who have a lien on your property either because they extended credit to you at the time you bought an asset or because you pledged your property as collateral for a personal loan. Generally, secured debt is associated with assets like your home, your car, or your "toys."

The Chapter 13 plan will also have to show that the total payments you propose to make to your "unsecured creditors" are at least equal to the value of the nonexempt property they would receive had you filed a Chapter 7 bankruptcy. Unsecured debt is debt associated with credit cards and other open-ended "revolving" type accounts like store credit, as well as debts to doctors, hospitals, lawyers and most creditors who get a judgment against you in connection with a lawsuit, for example.

How long must the plan last? That will depend on how much income you have. Filers whose average monthly income for the 6-month period preceeding filing is less than the Florida median have the option of submitting a 3-year plan. But, if your income exceeds the median, you must propose a 5-year plan.

How much must I pay under my plan? A Chapter 13 plan must provide for payment of your "projected disposable income" to your creditors over the life of the plan. As mentioned before, in order to be approved by the bankruptcy court (plan "confirmation") the plan must provide for payment of 100% of the debt owed to some creditors. But it is possible to have a plan approved by the bankruptcy court even though the plan contemplates payment of only part of your unsecured debt (or even no payment to them). This could happen for example if your "disposable income" is entirely consumed by mandatory payments such as installment payments due to secured creditors, child support and alimony.

What happens to the debt I still owe on my unsecured debt at the end of my plan term? Generally, whatever debt remains on most debt is discharged. That would include debt on credit cards, the unsecured portion of secured debt (for example, where the property is over secured meaning the total of the loans secured by the property exceeds the value of the property), medical bills, lawyers and doctors bills and most court judgments and other loans. It may even include some debts that would have survived a Chapter 7 bankruptcy such as debts incurred to pay taxes or obligations to an ex-spouse that are not for support such as obligations under a property settlement agreement.

Besides potentially having to appear for a "confirmation" hearing you may have to make additional court appearances. For example, that could happen if the following were to happen:

(a) you need to amend your plan due to a change in your circumstances during the 3-5 year term and had to seek confirmation of your new plan;

(b) to seek court approval of a proposal to have a debt discharged that is not normally dischargable, for example, to assert the "hardship" exception to the nondischargability rule with respect to student loans;

(c) you are required to defend a creditor's attempt to oppose your right to a discharge for any justifiable reason such as where it is alleged that you obtained credit based on fraudulent representations;

(d) there is a dispute between you and a creditor concerning the value of property in a situation where you were attempting to "cramdown" a debt to the value of the property or "strip" a lien from property in a case where the creditor is no longer a secured creditor because of a drop in property values; or,

(e) to eliminate a lien on your debt that would otherwise survive the bankruptcy.

What are the disadvantages of filing a Chapter 13 bankruptcy case as opposed to seeking protection from creditors under Chapter 7? Even though the new bankruptcy law that became effective in 2005 made it more difficult for individuals to file a Chapter 7 bankruptcy, most people who can qualify usually chose to do so over seeking protection under Chapter 13. There are many reasons for this including the following:

(1) Chapter 7 is a relatively speedy process, usually lasting between 4-6 months;

(2) most people are able to keep most of their property either under the Florida exemptions or because they have little or no equity that is of interest to the trustee;

(3) filing a Chapter 13 plan is costly because payments are generally made "through the plan" meaning a monthly lump sum payment is usually made to the trustee who in turn makes distribution to the creditors - in exchange for a commission which significantly increases the cost of the debt;

(4) by filing under Chapter 13 you run the risk that you might make a significant "dent" in your unsecured debt under the plan (debt that would have immediatly been discharged under Chapter 7 but ultimately have to "convert" your case to a Chapter 7 anyway due to circumstances beyond your control such as health problems or being laid off from your job.)