B. Grant McNutt

Chapter 13 bankruptcy is nationally a less commonly filed form of bankruptcy, and it isn’t what most people think about when they hear the word “bankruptcy.” Most folks think about Chapter 7 or straight bankruptcy when they hear the word bankruptcy. In Alabama, Chapter 13 bankruptcy is a more popular choice. Nearly 2/3 of bankruptcy filings in Alabama last year were Chapter 13 case. Alabama is one of just 8 states that saw more Chapter 13 filings than Chapter 7 filings in 2019. Other states favoring Chapter 13 during that time are all Southern states: 

  • Arkansas: 52% Chapter 13
  • Georgia: 57% Chapter 13
  • Louisiana: 69% Chapter 13
  • Mississippi: 53% Chapter 13
  • North Carolina: 60% Chapter 13
  • South Carolina: 60% Chapter 13
  • Tennessee: 58% Chapter 13

Thus far, the 2020 breakdown is similar in these states. 

Still, most people seeking solutions to financial difficulties have only a very general understanding of Chapter 13 bankruptcy. While the bankruptcy discharge–elimination of the legal obligation to pay certain debts–is the centerpiece of a Chapter 7 case, Chapter 13 is built around a three to five year repayment plan.

Who Files Chapter 13? 

Chapter 13 bankruptcy isn’t right for everyone. Some common reasons people choose Chapter 13 over Chapter 7 include:

  • The need to manage secured debts, which can’t be discharged in Chapter 7 unless the property is surrendered
  • Having too much income to qualify for Chapter 7
  • Having non-exempt assets they want to keep

Chapter 13 filers don’t have to pass a means test like those filing Chapter 7, but there are some limits. First, the Chapter 13 filer must have income that will allow for regular monthly payments to the trustee. There are also limits on the amount of debt that can be included in a Chapter 13 plan. However, the limits are high and aren’t an issue for most people considering bankruptcy.

In 2020, the limits are $419,275 in unsecured debt and $1,257,850 in secured debt. 

The Chapter 13 Repayment Plan

At first glance, it may not be clear how a payment plan helps. Most people at the point of exploring bankruptcy as an option have already juggled payments in every way they could imagine. But, a Chapter 13 plan can offer several advantages, including: 

  • The opportunity to catch up past-due balances over time without mounting late fees, collection actions, and threats such as repossession and wage garnishment
  • Possible adjustments in certain loan balances, such as a reduction in the outstanding balance on certain car loans and other secured loans
  • Adjustments to high interest rates (oftentimes well over 20%) to very reasonable rates (5% to 6.5%) saving $1000’s of dollars over the life of the loan
  • Paying only a pro-rata amount of your unsecured debt resulting in possible discharge of a portion of unsecured debt on completion of the plan

Here’s how it works:

A proposed plan is filed with the bankruptcy petition or within 14 days of filing. The plan must generally be for three years for below-median earners and five years for above-median earners, though there are a few possible exceptions. 

The plan sets forth what the petitioner will pay to each creditor across the life of the plan, and what the fixed monthly payment to the trustee for distribution to creditors will be. Debt falls into three categories, and each is treated a bit differently: 

  • Priority debt, such as most types of tax debt and back child support: must be paid in full through the plan
  • Secured debt: at least the value of the asset serving as security must be paid back through the plan, and in some cases the full outstanding balance on the loan, but with lower interest rates, if the bankruptcy filer wants to keep the property
  • Unsecured, non-priority debt: depending on the debtor’s disposable income, may be paid in full, in part, or not at all

The bankruptcy attorney’s fees are often built into the plan, and the bankruptcy trustee is paid on a percentage basis.

Creditors and the bankruptcy trustee will have an opportunity to object to the plan. Some possible reasons for objection include:

  • The trustee or a creditor disagrees with the value the petitioner has assigned property that serves as collateral on a secured loan
  • The plan proposes to pay less than 100% of unsecured debt, but not all disposable income is committed to the plan 
  • The trustee or a creditor disagrees with the classification of a debt
  • Unsecured creditors will not receive at least as much as they would have in a Chapter 7 case
  • The plan appears to be unsustainable due to insufficient income

The trustee may object to plan confirmation for administrative reasons, as well. For instance, if the petitioner hasn’t provided adequate income documentation, the trustee may be unable to evaluate the plan. 

Protecting Against Objections

Of course, the better prepared you are, the less likely it is that a creditor or the bankruptcy trustee will raise a successful objection to your plan. That means providing complete and accurate documentation to your attorney and the bankruptcy trustee, not attempting to hide anything, and working with your bankruptcy lawyer to ensure that the plan fulfills all of your obligations. 

Bond & Botes Helps People Struggling with Debt

The attorneys at Bond & Botes have decades of experience helping people in Alabama, Mississippi and Tennessee navigate the U.S. Bankruptcy Courts. To learn more about how we may be able to help you take control of your debt and build a better financial future, schedule your free consultation right now with one of the experienced bankruptcy attorneys at Bond & Botes. We can answer all your questions regarding Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, stopping a foreclosure or wage garnishment, avoiding liens, stopping law suits, discharging medical debt, personal loans, payday loans, credit card debt, etc.  We can alleviate your stress! We want to help and we can help you! 

Alabama State Bar requires the following: “No representation is made that the quality of legal services to be performed is greater than the quality of legal services performed by other lawyers.”

Bond, Botes, Sykstus, Tanner & McNutt, P.C.

Web: www.bondnbotes.com

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102 South Court St, Suite 314, Florence, AL 35630

Phone: 256-760-1010 • Fax: 256-760-1023

Office Hours: Monday – Friday • 8am to 5pm

No representation is made that the quality of legal services to be performed is greater than the quality of legal services to be performed by other lawyers.