Filing for Chapter 13 Bankruptcy: Is it the right choice for you?

Most people who file bankruptcy in Michigan opt for Chapter 7. Their case is over in a matter of months and they can start rebuilding more quickly. This is one of the reasons why the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was passed: to direct those who can afford to repay some or all of their debts to file Chapter 13 instead.

Unlike Chapter 7, Chapter 13 involves a repayment plan that requires you to pay off a percentage of your debt over a three to five-year period before you can be discharged. While this makes it sound like Chapter 13 is structured solely to benefit creditors, the truth is that for many debtors, it’s the right solution for their financial difficulties. In this blog, we’ll explain why.

Reasons why you might want to file Chapter 13

Chapter 13 is often referred to as the ‘wage earner’s plan’ because filers need to have regular income in order to qualify. Your income doesn’t have to be high- even those whose household income is below the median for their state (and would otherwise qualify them for Chapter 7) opt for Chapter 13 for reasons like those below.

• Keep your property: Unlike Chapter 7, Chapter 13 does not generally require you to surrender nonexempt property to your trustee. If you have property that you don’t want to lose, Chapter 13 lets you keep it as long as you follow the terms of your bankruptcy.

Avoid foreclosure:  If your home is being foreclosed upon, Chapter 13 can stop the proceedings and give you the opportunity to repay arrears while maintaining current payments as they come due.

Protect cosigners: Chapter 7 protects you from collection efforts, but your creditors can still go after anyone who co-signed your debts. Chapter 13 prevents them from being forced to pay your debts because you are continuing to make payments.

You have a lot of priority debt: Priority debts are those that must be paid in full, such as child support, alimony, student loans, and most taxes. Although they cannot be discharged, Chapter 13 makes it possible for you to pay off the arrears over three to five years and avoid consequences like lawsuits and wage garnishments.

Who is eligible for Chapter 13?

Any debtor with a regular income can file for Chapter 13, as long as their debt does not exceed the threshold. (In 2020, this limit is currently $419,275 for unsecured debts like credit cards and medical bills and $1,257,850 for secured debts like mortgages and car loans.) 

Your income will determine how much you pay each month as well as your repayment plan timeline. In general, if you make less than the median level in Michigan, you’ll repay your debts over three years. If you make more, the plan will last for five years.

You are not eligible for Chapter 13 relief if:

• Your secured and unsecured debts exceed the above-referenced thresholds.

• You’ve had a bankruptcy dismissed within the previous 180 days for failure to appear or comply with court requirements.

• You’ve been discharged from Chapter 13 within the last two years or from Chapter 7, 11, or 12 within the last four years.

Contact the Bankruptcy Attorney Team at Maxwell Dunn PLC

If you have a regular income and don’t want to risk losing assets or jeopardizing co-signers in a Chapter 7 filing, Chapter 13 may be the best choice for you. At Maxwell Dunn PLC, we can meet with you, review your financial situation, and help you identify the right solution for resolving your debt. For more information or to schedule a consultation, contact us today.