The Basics: More of the Simple Chapter 13 Case

Even a simple Chapter 13 case can do some very special things.


Some of the Simple Benefits of Chapter 13

Even in a simple Chapter 13 case, you could:

1) catch up on your mortgage arrearage, have up to 5 years to do so, while continuously being protected from foreclosure;

2) possibly “strip” off a second or third mortgage from your home’s title;

3) possibly do a “cramdown” on your vehicle loan(s), reducing both your monthly payments and the total amount paid for your vehicle(s);

4) pay that portion of back income taxes that can’t be discharged, while being protected from tax collection by the IRS and state tax agencies;

5) cure child and/or spousal support arrearages while being protected from the extreme collection powers of support enforcement agencies; and

6) keep assets that you would lose under Chapter 7.

We covered the first two of these in the last blog, and now cover the rest of them here.

Vehicle Loan “Cramdown”

If your vehicle loan is more than 910 days old (about 2 and a half years), and you owe more on it than your vehicle is worth, Chapter 13 allows you to do a “cramdown” on it: reduce the secured debt amount to the vehicle’s value, often lower the interest rate, and stretch out the payments, often significantly reducing the monthly payment. You only pay the remaining portion of the debt (the unsecured portion) to the extent, if any, that you have funds available during the case to do so.  “Cramdown” can often allow you to pay off your vehicle loan for thousands of dollars less. Again, this is only available under Chapter 13.

Pay Income Tax While Protected                      

Although you can discharge—legally write off—some income taxes under Chapter 7 if they meet certain timing and other conditions, you may well owe some taxes that would not be discharged. At that point you could enter into an installment agreement with the IRS or the state to pay those remaining taxes, or try to settle them through an IRS Offer in Compromise or similar procedure with the state.

But Chapter 13 provides what is often a better alternative for dealing with such tax debts. It can handle all of your tax debts in one tidy package. This includes arranging for payments on those taxes that are not being discharged, with the amount of payments being based on your budget instead of on the whims of the taxing authorities. This often means that even more urgent obligations—such as curing the arrearage on a mortgage or vehicle loan—can be paid ahead of the taxes. Also, usually penalties that accrued up to the time of Chapter 13 filing do not have to be paid in full, and often are paid nothing or very little. Interest and penalties stop accruing once you file the Chapter 13 case, which alone can save a lot of money, allowing you to pay off your taxes faster. Furthermore, while you are in the Chapter 13 case, the IRS/state cannot continue taking any collection efforts against you, such as recording tax liens or levying on your wages or accounts. At the end of your successful Chapter 13 case you would be tax-free.

Pay Back Support While Protected

Support collections methods can be extremely aggressive. Your ex-spouse and the support enforcement agencies have tremendous powers at their disposal if you fall behind on your support obligations. They have the usual capacity to garnish your wages and levy on your bank and credit union accounts, and generally to do so without needing to sue you because the divorce judgment acts as a continuing authority to garnish and levy. In most states they can also suspend your driver’s license, as well as any occupational or professional license that you may have, all supposedly to induce you to catch up on your back support quickly.

Chapter 13 can’t change your monthly child or spousal support obligation amount—only your state domestic relations court which originally ordered the support can do so. Neither can it discharge (legally write off) any support debt or stop collection efforts on the REGULAR monthly support. What Chapter 13 CAN do which Chapter 7 can’t is stop collection efforts for BACK support. It can force your ex-spouse/support enforcement agency to accept catch-up payments based on your actual ability to pay. Most importantly, your Chapter 13 filing will stop all these super-aggressive collection procedures forever, as long as you maintain your regular support payments going forward, demonstrate in your court-approved plan how you will bring the back support current, and then comply with what you’ve proposed.

Keep All Your Assets Even Those Not “Exempt”

Chapter 13 provides a simple mechanism for keeping and protecting your assets which are not exempt and which would have to be given to the bankruptcy trustee if you were to file a Chapter 7 case. Your Chapter 13 plan simply needs to arrange to pay—over its 3-to-5-year duration—a sufficient extra amount to cover however much a Chapter 7 trustee hypothetically would have received from the sale of your non-exempt assets. You get to keep those otherwise unprotected assets by paying for the privilege to do so, but doing so on terms based on your actual budget and ability to pay. 

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