Will Filing for Chapter 13 Bankruptcy Erase All Debt?
Filing for Chapter 13 bankruptcy allows you to reorganize your debts, catch up on unpaid mortgage payments and other loans, and repay your debts by establishing an affordable repayment plan. Also called the Wage Earner’s Bankruptcy, Chapter 13 is a viable option if you earn a regular income but have accumulated substantial debt and are having difficulty keeping up with payments. Keep in mind, however, that even if you qualify for Chapter 13 and meet the repayment plan requirements, no bankruptcy filing eliminates all debts. An experienced bankruptcy lawyer will assist you, discuss the debts you can wipe out, and what happens to any remaining debt.
How Does Chapter 13 Work?
To qualify for Chapter 13, you must have a steady income and be current on your tax filings. In addition, you may not file for Chapter 13 if you have filed within the past two years, you may not have unsecured debt of more than $419,275, and your secured debt must be under $1,257,850. Remember, these figures will fluctuate to reflect changes in the consumer price index.
Once you file for Chapter 13, the court will issue an automatic stay, which stops foreclosure proceedings and evictions as long as they remain pending. An automatic stay will also stop wage garnishments and certain lawsuits. However, if you are involved in a criminal case, this will continue, and creditors can continue to collect support payments.
What Are the Benefits of Filing for Chapter 13?
The two most common forms of bankruptcy are Chapter 13 and Chapter 7. While Chapter 7 takes approximately three to four months to complete, it is primarily for low-income filers and does not offer a payment plan to keep property if you fall behind on payments. Chapter 13 provides more benefits than Chapter 7, but you must have sufficient income to take advantage of the repayment plan. The following are examples of benefits that only Chapter 13 offers:
- Stops mortgage foreclosure. Once you file for Chapter 13 bankruptcy, this will halt the foreclosure process, allowing you to repay overdue mortgage payments and stay in your home. The lender must accept a payment plan allowing you to make up missed payments over a specified period. However, you must demonstrate sufficient income to pay overdue debt and remain current on all future payments.
- Allows you to keep property that is not protected by a bankruptcy exemption. You can take advantage of bankruptcy exemptions by saving items you need to work and live. While a Chapter 7 debtor gives up nonexempt property, and the trustee liquidates unprotected property to pay creditors, Chapter 13 filers pay the value of the nonexempt property to creditors through the repayment plan.
- Allows you to “cram down” secured debt. If you file for Chapter 13, you may be able to reduce an obligation to the replacement value of the property securing it. This is known as a “cramdown.” However, there are exceptions. For example, if you purchased a car during the 30 months before bankruptcy, you may not cram down a car debt. In addition, you may not take advantage of the cramdown provision to reduce a residential home mortgage.
- You may use “lien stripping” to eliminate a junior residential home. This is only available if your home is worth significantly less than the total amount that you owe.
What Debts Are Forgiven in Chapter 13 Bankruptcy?
The following are examples of unsecured debt that you can wipe out in Chapter 13 bankruptcy:
- Credit card balances
- Medical debt
- Personal loans
- Outstanding utility bills
- Older income taxes that qualify as nonpriority debts
Are There Debts That Cannot Be Eliminated in Chapter 13 Bankruptcy?
Regardless of the type of bankruptcy you are filing for, there are certain types of debt that you cannot eliminate during the bankruptcy process, including the following:
- Secured debt: Chapter 13 bankruptcy does not prevent a secured creditor from foreclosing or repossessing property you cannot afford. While bankruptcy does eliminate certain debts, it does not eliminate liens, which allow the lender to take the property, sell it at auction, and use the proceeds to pay the loan balance. A lien will remain on the property until the debt is paid.
- Child support and alimony: Chapter 13 bankruptcy does not eliminate child support and alimony obligations. You are expected to make these payments in full, even if you have filed for bankruptcy.
- Student loans: For a student loan to be discharged, you must be able to show that repaying the loan would cause you “undue hardship.” To meet this standard, you must prove that you cannot afford your loan payments and that it is unlikely that you will be able to afford them in the future.
- Tax debts: While it may be possible to eliminate older unpaid tax debts, eliminating tax debt in Chapter 13 bankruptcy is not easy.
- Other non dischargeable debts: Other examples of debts not dischargeable in Chapter 13 bankruptcy include debts you failed to list in your bankruptcy papers, debts for personal injury or death caused by impaired driving, and fines and penalties imposed as punishment, including traffic tickets or criminal restitution.
Our Tolland County Bankruptcy Lawyers at the Law Offices of Jason L. McCoy, LLC Assist Clients With Every Aspect of Chapter 13 Bankruptcy
If you are overwhelmed by debt and have questions about Chapter 13 bankruptcy, do not hesitate to contact our Tolland County bankruptcy lawyers at the Law Offices of Jason L. McCoy, LLC. We will guide you through every step of the process. To schedule a free consultation, call us today at 860-872-7741 or contact us online. Located in Vernon, New Haven, and Waterbury, Connecticut, we serve clients in Tolland County, New Haven County, and Hartford County.