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Chapter 13

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Understanding Chapter 13 Bankruptcy 

Q: What are the differences between Chapters 7 and 13?

A: Chapter 7 of the Bankruptcy Code is entitled "Liquidation" and, as the name implies, generally requires sales or foreclosure of all property except property deemed to be exempt. In most instances, the Chapter 7 debtor is promptly discharged from all or most pre-bankruptcy debts and receives a fresh start on a new economic life. This new economic life frequently begins only with exempt assets. Chapter 13 is entitled "Adjustment of Debts of Individuals with Regular Income." It is often called "wage earner" or just "Chapter 13." Chapter 13 debtors pay all or part of their debts through future income rather than through liquidation or foreclosure of present assets. Chapter 13 is available only to individuals with regular income whose non-contingent, liquidated unsecured debts are less than $250,000 and whose secured debts are less than $750,000. Corporations and partnerships are not eligible for Chapter 13. The Chapter 13 debtor's income must be regular, but can come from such things as self-employment, pension, welfare or alimony.

Q: How does Chapter 13 work?

A: Under Chapter 13, the debtor presents a plan of debt repayment which is reviewed by the Chapter 13 trustee, creditors and the Bankruptcy Court. The plan must be filed in good faith, must provide for payments that are feasible in light of the debtor's income and expenses and must also provide for payments over time that are equal in value to the money creditors would have received if the debtor had chosen Chapter 7 liquidation instead of Chapter 13. The plan must also provide that, for a period of three years, all of the debtor's income above reasonable expenses will be used to pay debts. If the Chapter 13 plan is approved, all payments are made through the Chapter 13 trustee's office, and the trustee is paid a commission. Most plans must run at least three years and cannot exceed five years. Chapter 13 provides that the debtor receives a discharge from most pre-bankruptcy debt upon making the payments called for by the plan.

Q: Can I keep my property?

A. Chapter 13 debtors often keep property they would lose in a Chapter 7. Keeping secured property in a Chapter 7 usually requires the creditor's agreement. Secured creditors do not have such control in a Chapter 13. Consequently, Chapter 13 debtors usually keep their cars, house and other important property subject to security interests, even if the creditor wants the property back. Property not subject to security interests can also be kept in a Chapter 13, even though its value is not exempt and would be lost in a Chapter 7.

Q. How about paying taxes?

A: Filing bankruptcy under either Chapter 7 or Chapter 13 will stop all IRS or state tax collection activities on taxes accruing prior to filing bankruptcy. But if a Chapter 7 is filed, these tax collection activities often resume shortly after filing because the tax obligation usually cannot be discharged in bankruptcy. Furthermore, interest and penalties continue to accrue. On the other hand, filing a Chapter 13 halts the accumulation of interest and penalties, and taxes may be paid over the life of the plan. The filing of bankruptcy does not stop the IRS or state from assessing or demanding payment of taxes arising after bankruptcy.

Q. What about non-dischargeable debts?

A: Most debts can be discharged under either Chapter 7 or Chapter 13, some cannot be discharged under either chapter and some can only be discharged under Chapter 13. For example, debts involving fraud and embezzlement may be dischargeable through a Chapter 13 if the plan is confirmed. Debts arising from child support, alimony, student loans, criminal fines and criminal restitution debts, on the other hand, are among those which cannot be discharged under either chapter. However, Chapter 13 has an advantage over Chapter 7 because the Chapter 13 debtor is protected by the bankruptcy court while making payments under the plan.

Q. Can I protect others liable on the debt?

A: Creditors are prohibited from attempting to collect pre-bankruptcy debts from a debtor under either Chapter 7 or Chapter 13. But the filing of a Chapter 13 can also stop all actions against certain co-debtors, even though those co-debtors are solvent and do not join the Chapter 13 petition. This protection may be permanent if the plan provides for payment of the co-signed debt in full and is fully performed.

Q: What are the disadvantages of Chapter 13?

A: Debtors remain under court supervision for the life of the plan, which is up to five years. They are not free to make new debts or sell assets without permission. Debtors who propose less than full payment to their unsecured creditors will be required to live on a budget for the life of the plan. The plan payments may be deducted directly from the debtor's salary by order of the court. If plan payments are not made, the case may be dismissed by the court on motion by the trustee or any creditor may petition the court to have their property returned. Some courts require that you surrender recently purchased property or luxury items before they will confirm a Chapter 13 plan. Chapter 13 is a form of bankruptcy and will appear as such as on your credit record even if you pay all of your creditors in full.