A chapter 13 bankruptcy is a repayment plan where you typically repay only a portion of your debts. Filing Chapter 13 bankruptcy is kind of like calling a “time out” for your finances. We can stop all debt collection, lower car interest rates and payments, allow time to catch up on your mortgage, and create a budget that only requires you to repay the amount of debt that you can afford to repay. At the end of the 3 to 5 year period you will typically have your cars paid off, mortgage current, tax debts resolved, and other dischargeable debts forgiven. This is usually much cheaper than informal debt consolidation plans and is also guaranteed to succeed as long as you follow the terms of the repayment plan.

Calculating a Chapter 13 Plan payment can be complicated and I recommend that this be done only by an experienced Utah Chapter 13 bankruptcy attorney. However, here are some basic principles that govern what must be repaid.

You must pay your extra disposable income. First, your income is compared to the median income for the state of Utah. If your income is above that level then we will use a means test form to calculate the minimum that must be repaid.
Second, we prepare a budget with your actual and reasonable monthly expenses (including an allowance for cable, internet, and some recreation). Any excess is required to be paid into the plan.

You must satisfy the Best Interest of Creditors Test. Your Chapter 13 Bankruptcy must pay creditors at least as much as they would have received if you filed a Chapter 7 liquidation case. Essentially, the more non-exempt assets you have, the higher your payment will be. 

Chapter 13 Bankruptcy is a good option when you have equity in cars, a home, or other assets that you want to keep

Utah exemptions are not very generous. If you have acquired equity in your home or car that exceed the Utah exemptions then filing a Chapter 13 bankruptcy can usually allow you to keep your belongings while only repaying a fraction of your debt.

Chapter 13 Bankruptcy is a good option when you want to stop a foreclosure and keep your home

If your home is about to foreclose then you should strongly consider filing Chapter 13 Bankruptcy. A Chapter 13 bankruptcy can stop foreclosure and force the bank to accept the arrearage (missed payments and fees) over a period of up to 60 months, at 0% interest.

In a Chapter 7 bankruptcy a foreclosure is only briefly delayed.

Chapter 13 Bankruptcy is a good option when you have a second mortgage or HELOC that can be eliminated.

An excellent reason for a client to file a chapter 13 bankruptcy rather than a chapter 7 is to strip off and eliminate a second mortgage. In order for this to work the home must be worth less than the first mortgage. I have been able to assist many clients in removing their second mortgages in bankruptcy. This housing market provides many opportunities to strip loans from depreciated homes.

I was recently able to eliminate a second mortgage for a client who originally wanted to just file a chapter 7 and keep paying their first and second mortgage. Their second mortgage was approximately $40,000. The client was skeptical at first because, like many people, they heard that chapter 7 is better than chapter 13. In the end I was able to get a plan confirmed where their monthly payment (including attorney fees) is less than their second mortgage payment was, and they will be paying that for fewer than five years rather than 25 years to repay the second mortgage. I saved the client well over $35,000.

Chapter 13 Bankruptcy is a good option when you have high interest rates on car loans, owe more than what your car is worth, or need to reduce your car payments

In a Utah Chapter 13 plan we can usually lower your car payments and often save you money over the long run. If you have refinanced your car or purchased it more than 2½ years (910 days) of the bankruptcy filing then you only have to repay what the car is really worth rather than the full amount owed. Even if the car was purchased less than 2½ years ago, we can still reduce the interest rate and reduce your payments by spreading payments out over a period of up to five years.

It may not sound like much, but these changes often save you thousands of dollars.

Chapter 13 Bankruptcy is a good option when a divorce decree / order requires you to repay debt

In 2005 the bankruptcy laws changed to require a person to file a Chapter 13 Bankruptcy to eliminate debt “to a spouse, former spouse, or child of the debtor…that is incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record”.

Essentially this means that a chapter 13 must be filed to eliminate your responsibility to repay a debt that a divorce decree says that you are responsible for (or 1/2 of). This is because the obligation to repay these debts is owed to your ex-spouse, who will now owe the creditors. If you only file a Chapter 7 Bankruptcy then your ex-spouse retains the right to sue you by bringing an Order to Show Cause for failure to comply with the order of the divorce court, and you may be held in contempt of court.

For example, if you assumed the responsibility to pay for a cosigned home or car in a divorce, but just can’t afford it now, you will probably need to file a Chapter 13 bankruptcy to eliminate your responsibility to repay that debt. This can get tricky, so you should speak with an experienced bankruptcy attorney to see what is necessary in your situation.

Chapter 13 Bankruptcy is a good option when you have filed a Chapter 7 within the past 8 years

A Chapter 13 discharge can be granted as soon as 4 years after filing for chapter 7 or 2 years after filing a previous Chapter 13. In some cases a Chapter 13 can be filed sooner and can be helpful even if a discharge isn’t granted.

Chapter 13 Bankruptcy is a good option when you have high income

The purpose of bankruptcy is to eliminate debt for honest debtors who are unable to repay all that they owe. Debtors with a large amount of debt and substantial income may still benefit from filing a Chapter 13 Bankruptcy. In these situations we create a plan that pays off as much debt as possible during a 5 year period and the remainder is forgiven. This option is typically much cheaper than debt consolidation and is guaranteed to work as long as all payments are timely made (unlike debt consolidation).