Giving More Thanks for Chapter 13 “Adjustment of Debts”
We’re lingering in the Thanksgiving spirit by appreciating what Chapter 13 has to offer.
Beyond the first 3 we covered a couple days ago, here are 3 more impressive features of Chapter 13 which are completely unavailable under Chapter 7 “straight bankruptcy”:
4) The “Co-Debtor” Stay
The “co-debtor stay” enables a person filing a Chapter 13 case to immediately prevent a creditor from requiring a co-signer to pay a co-signed consumer debt. Depending on what you want, that protection can be either temporary or permanent.
The protection is temporary if the creditor asks the court for permission to pursue your co-signer and you don’t do anything to prevent that from happening.
The protection of your co-signer is permanent if you arrange in your 3-to-5-year Chapter 13 payment plan to pay the co-signed debt in full. Most of the time you are allowed to pay a co-signed debt in full through your Chapter 13 payment plan while paying less, or sometimes even nothing, to most of your other debts. That is, in most parts of the country you can completely favor your co-signed creditor to the detriment of your other creditors.
As a result, your co-signer is immediately protected upon the filing of the Chapter 13 case, he or she is protected throughout the life of the Chapter 13 case, and when the case is over you’ve paid the debt in full so that the creditor has no further recourse against your co-signer.
5) Protection beyond Property “Exemptions”
If you have an asset which you really need (or simply want to keep) but is not covered by a property exemption, under Chapter 7 the bankruptcy trustee could take and sell it, giving the proceeds to your creditors. But instead under Chapter 13 you can keep that asset by paying for the privilege during the course of your payment plan.
You do that by paying to your creditors as much as they would have received if you would have surrendered that asset to a Chapter 7 trustee. But you have 3 to 5 years to do that, throughout which time you are under the protection of the bankruptcy court. Your Chapter 13 payment plan is structured so that your obligation is spread out over this length of time, making it relatively easy and predictable to pay (in contrast to, for example, negotiating with a Chapter 7 trustee to pay to keep an asset).
You may even be able to keep your non-exempt asset(s) in a Chapter 13 case without paying anything more to your creditors. This tends to be more likely if are also in the Chapter 13 case because you owe taxes or back support payments. One of the biggest advantages of Chapter 13 is that it can play your financial problems—like having too much assets and owing back taxes—against each other. You may be able to pay money into your plan that both protects your assets and pays the taxes and/or support that you can’t discharge anyway. So you can get your assets protected and taxes/support paid, and finish the case free and clear of your debts.
6) Catching up on Child and Spousal Support Arrearage
If you’re behind on support payments, only Chapter 13 can stop your ex-spouse or support enforcement agency from very aggressively pursuing you, and give you a reasonable time to cure your support arrearage, if you follow the rules.
Bankruptcy is limited in its ability to help deal with child and spousal support debts, with Chapter 7 not able to directly help at all other than to free up money so that you can pay ongoing and back support. However, Chapter 13 CAN stop the collection of any support that you are behind on as of the date the case is filed, giving you a very flexible way to catch up on what you owe without the huge pressure that your ex-spouse or the support enforcement agency usually puts on you. But this huge benefit comes with conditions and responsibilities, so be sure to fully understand and follow the rules.
Besides earmarking enough money within your plan to pay off the unpaid support payments owed, you must also:
- Keep strictly current on your ongoing support (assuming you continue to owe it). This includes being very clear about when the first monthly support payment is due after your Chapter 13 case is filed and making sure it is paid on time. Otherwise your ex-spouse/support enforcement can immediately inform the bankruptcy court that you’ve not made the payment and get permission to start/resume collection of the back support.
- Keep current on your monthly Chapter 13 plan payments. Those plan payments are what is paying the support arrearage (along with whatever other debts you are paying through the plan). So if you fail to make a single payment on time—at any time in your case—your ex-spouse/support enforcement can ask the court for permission to resume collection of the back support amount.
Chapter 13 gives you extraordinary power to stop collection of whatever support you owe at the time that your case is filed, as long as you are very vigilant and not squander that power. If you do it right, you’ll come out of your Chapter 13 case current on your support obligation, and, other than a home mortgage, likely completely debt-free.