In precarious times, when local economies are faltering, many people attempt to retain their homes despite mounting debts.
The Bankruptcy Code, under Chapter 13, provides an individual wage-earner with a mechanism of proposing a “plan” or reorganization, in which the “debtor” may retain the asset and make payments to creditors. The most common reason for a debtor to file a petition under Chapter 13 is to protect his primary residence from foreclosure sale.
As opposed to a bankruptcy petition under Chapter 7, where the debtor turns over to the trustee all non-exempt assets for distribution to creditors in proportion, the Chapter 13 debtor will make regular payments to the trustee pursuant to a plan (which may range in term from three to five years). For instance, if the debtor has a house worth $100,000, and wants to keep it, the debtor will propose a plan to pay creditors during the term of the plan that same value in order to retain the property. A basic tenet of Chapter 13 is that the proposed plan will pay creditors more than if the debtor had filed a Chapter 13 petition for liquidation.
One of the most important considerations in filing a Chapter 13 and, ultimately, confirming the plan is whether the debtor has the ability to make the requisite payments. Since the debtor must pay not only the scheduled plan payments to the trustee for the arrearages on the mortgage and other listed creditors, but also current mortgage payments, special consideration must be made of the debtor’s income and expenses to test affordability.
The greatest benefit of filing a Chapter 13 petition is the “automatic stay” under the Bankruptcy Code. This stay stops all actions on the part of creditors to collect their debts. In the typical case, the stay stops the upcoming mortgage foreclosure auction sale on the courthouse steps. It cannot be understated that the timing of the filing of the petition is significant; e.g., the filing of the petition after the foreclosure auction sale is generally fatal to attempting to retain the real property in the debtor’s bankruptcy estate. Another benefit of Chapter 13 is to file a plan that proposes to pay creditors less in percentage than that owed. Certain calculations to determine the appropriate reduced percentage are necessary.
