Manage Your Debt Absolutely: Chapter 13

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    Nov 26, 2012
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So you are overwhelmed with unmanageable debt and may have even explored managing your debt with the private debt management companies and have come away from that experience disillusioned and disappointed. You may even have additional debt as a result of that experience. A chapter in bankruptcy can guarantee a financial fresh start. There are two consumer bankruptcy chapters that most clients are aware of: Chapter 7 and Chapter 13. The essential difference between the chapters is that Chapter 7 does not involve payments to a Chapter 7 Trustee whereas Chapter 13 involves payments to a Chapter 13 Trustee. Both chapters result in the ultimate elimination of debt, but in doing so, each chapter deals with different classes of debt in achieving the goal of debt elimination or debt management. A discussion of the differences follows.

Whichever chapter is filed, what is essentially a net worth statement of the client is calculated and then filed along with the client's bankruptcy case in the bankruptcy court. A net worth statement is a listing of the value of the client's assets (house, cars, personal property, bank accounts, investments, etc.) and a listing of the client's debts. If the total debt exceeds the value of the client's assets, his net worth is zero. If the asset value of the client exceeds his total debt, then the client's net worth is a positive value. When there is a positive value of net worth, then certain exemptions (cash value) in various assets is applied by the bankruptcy court in order for the client to retain those assets in filing bankruptcy. Net worth is always of concern in filing bankruptcy.

In Chapter 7, the sole function of a Chapter 7 Trustee in administering a case is to find assets of the client that exceed the exempted value mentioned above, convert that asset to cash and distribute the cash among the client's creditors. The client is given an opportunity to “buy back” the nonexempt value to prevent the sale of the asset and thereby retain the asset. The typical Chapter 7 client has little or no net worth and is seeking to eliminate or discharge unsecured debt (credit cards, medical bills, etc.). If the client has a mortgage or car loan, in a Chapter 7, his only option is to surrender the collateral (house, car, etc.) to eliminate the debt or retaining the debt and the collateral and paying for the collateral pursuant to the original contract terms regarding the debt. Chapter 7 manages only unsecured debt.

Chapter 13 to the contrary of Chapter 7, manages ALL debt. Chapter 13 manages secured debt (mortgages, car loans, etc.), tax debt with the various taxing authorities including the IRS, and eliminates unsecured debt as in Chapter 7. Chapter 13 is a debt consolidation program which involves a payment to the Chapter 13 Trustee for a period of three (3) to five (5) years. Typically, the longer the program term, the lower the Chapter 13 payment.

As an example of a typical Chapter 13 client, let us assume he has a house mortgage and is four

(4) months behind in his payments and the mortgage company has filed a foreclosure action in state court. He is paying on a car on which the loan rate is 24%, he is behind on his payments and the creditor has repossessed his car. Additionally, he owes the IRS for 2011 taxes plus penalty and interest. He has $25,000.00 in unsecured debt and little or no net worth. A Chapter 13 plan would be filed for probably the five (5) year period for the lowest monthly payment.

Upon filing the case, the foreclosure action is automatically stopped and the client's car is returned to the client from the re-possessor. The monthly payment would provide for the mortgage monthly payment ongoing, a portion of the four month mortgage arrearage; paying off the car at 6% interest and paying the tax due to the IRS. At the conclusion of the plan, the client is current on his mortgage and resumes payments to the mortgagee on his own, his car is paid in full and he receives the car title, and the IRS is paid in full. The unsecured debt and the IRS tax penalty is eliminated without payment.

Chapter 13 bankruptcy guarantees management of ALL your debt.

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