A bankruptcy under Chapter 13 of the Bankruptcy Code is commonly referred to as a personal reorganization. One of the principal reasons for filing a bankruptcy under Chapter 13 is to stop the forced sale of an individual's home. The two most common types of forced sales are Sheriff's Sales and Tax Sales. A Sheriff's Sale is the end result of a mortgage foreclosure action. A mortgage foreclosure action is commonly filed because the owner of a home falls behind with the mortgage payments. Once an individual is multiple payments behind with the mortgage, the bank will usually accelerate the mortgage and thereby, demand payment of the full amount of the loan. Once this occurs, a homeowner's attempt to continue to make mortgage payments will be met with a refusal by the bank and return of the payments.
In a Chapter 13 bankruptcy, the mortgage arrearage is calculated and then that amount is used to create a Chapter 13 Plan. The Plan, typically, provides for repayment of the mortgage arrearage over 3 to 5 years. In a typical Chapter 13 bankruptcy, the Plan will provide that the individual begins, once again, by making the regular mortgage payment directly to the bank by the first of the month and then, making an additional payment to the Trustee, during the middle of the month. The amount paid to the Trustee is applied toward the mortgage arrearage. In most cases, an individual's credit card debt, medical debt and utility debt is either partially or completely discharged in this type of bankruptcy. The fact that these creditors will be discharged, "frees up" the additional money needed to make the payment to the Trustee.
A Chapter 13 Plan which addresses a property tax arrearage is similar to a Plan designed to address a mortgage arrearage. The only difference is that the tax arrearage is paid in the Plan, instead of the mortgage arrearage. In fact, in many cases the Chapter 13 Plan is designed to resolve both a mortgage arrearage and tax arrearage. In these types of cases, the Plan is usually structured so that one payment is made to the Trustee, per month, and then the Trustee divides the payment up according to the various classes of creditors.
Chapter 13 bankruptcies are not always filed to cure mortgage and tax arrearages. Many cases are filed because an individual has either too much income to file a Chapter 7 bankruptcy or too much property to file Chapter 7 bankruptcy. In these types of cases, an individual may have a large amount of debt. However, because of either the individual's income or property, a bankruptcy under Chapter 7 should not be filed.
Excess Income. In general, if an individual has too much income, then that person may not qualify for Chapter 7 under the Bankruptcy Code. Consequently, the only option may be to file a Chapter 13 bankruptcy in which a Plan is designed to address the excess income of the individual. For example, a bankruptcy under Chapter 13 may be designed to provide for a payment of $200.00 per month to the Trustee for 60 months ($12,000.00) in order to receive a discharge of debt. If for example, that person owes $40,000.00 in credit card debt, then the repayment of $12,000.00 to receive a discharge of $40,000.00, will still result in a net discharge of $28,000.00. Also, the filing of the bankruptcy will save a substantial accumulation of credit card interest, so the true net discharge is actually substantially more than what it may appear to be at first glance.
Excess Property. Many individuals have property that has substantial value, but their debt load is so great that a bankruptcy becomes unavoidable. In these types of cases, if they file a Chapter 7, the Trustee will be able to sell (liquidate) the excess property of the individual. The individual may want to keep all of the property so, instead of filing a Chapter 7, the individual files a Chapter 13 and instead of losing property, pays to a Trustee, on a monthly basis, an amount that, over 3 to 5 years, equals the value of the excess property. For example, an individual may need to file a bankruptcy, but owns a car that is free and clear of any liens. The car is worth $30,000.00. If the Debtor filed a Chapter 7, the Trustee would want to sell the vehicle to recover the excess value of the property. Instead, if the individual wants to retain the vehicle, a Chapter 13 bankruptcy can be filed in which the excess value of the vehicle is paid to the Trustee over a 3 to 5 year period of time.
In a Chapter 13 bankruptcy, the Trustee assigned to the case is paid a Trustee commission. A Chapter 13 Plan will normally provide for a 10% Trustee commission over the life of the Plan which equals 2% per year for a 5 year Plan. In many cases, the Trustee commission is subtracted from funds that would otherwise be paid to unsecured creditors. In these types of cases, the net cost to the individual who has filed the bankruptcy is zero.