Chapter 13 Bankruptcy

How Does Chapter 13 Work?

Chapter 13 is the most powerful, and most misunderstood debt relief option.  To understand how does chapter 13 work, you must know that it’s a payment plan that might pay back NOTHING to most or all of your creditors.

Chapter 13 is more powerful than Chapter 7 in many ways. But, Chapter 13 is overlooked by many attorneys and so, is underutilized by too many consumers.

Chapter 13 lets you do things that are not possible in chapter 7. You can lower your car interest rates, and even pay less than you owe for cars you keep. You can catch up on missed payments for your car and your home.

If you owe secured and unsecured debts (think car and credit card) to a credit union, chapter 13 “breaks cross collateralization” so you can keep your car and not pay the credit card debt.

What Does Chapter 13 Do?

Chapter 13 allows you to restructure your debt into a 3 to 5 year payment plan.  Some plans must be 5 years long, others can be from 3 to 5 years.  You can keep your current vehicle, and possibly pay less for it than you would pay if you reaffirmed it in a chapter 7. At the end of the plan your car debt is gone, and all your other debt is wiped out, with few exceptions.

In chapter 13, the amount you pay to your creditors depends on a number of factors, but my chapter 13 plans typically pay only 1% to the unsecured creditors.  That’s almost like a chapter 7 which pays 0%.

Sometimes the plan pays more, however.  To understand how does chapter 13 work for your payment, you start with your income.  If you are fortunate enough to have enough income to pay more than 1%, according to a federal law formula, then you might pay 5%, or 10%.  Occasionally plans pay a lot more, but that is seldom seen. Most plans pay a few pennies on the dollar, that’s all.

The main reason people file chapter 13 is to catch up on missed car and house payments.  Chapter 7 can’t help you with missed payments. Creditors can refuse to allow you to reaffirm in chapter 7 if you are behind.  But creditors can’t stop your chapter 13 payment plan.  The have to accept your late payments and they have to allow you to keep your car and your home.

An Introduction to Chapter 13 Bankruptcy

Chapter 13 Video

Richard West Law Office

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How Chapter 13 Plans Work

Chapter 13 payment plans are administered by a trustee, but the trustee does not monitor your bank account, or “look over your shoulder.”  Our Dayton Chapter 13 trustee is John Jansing, who does an excellent job helping us keep our client’s cases on track. Once your case is filed in the Dayton Bankruptcy Court, John will review it to make sure it will properly complete.

Your payments to the trustee can be made by payroll deduction, but I often ask for, and usually can get, a bank account withdrawal approved, so your employer does not get involved.

During the plan, you will make your payments regularly and each year you will submit your tax return to the trustee. The trustee is looking for two things.  First, did you get a refund over $3,000 (or more, if you get earned income credit)?  Second, has your income increased significantly since your case was filed?

Plan payments usually don’t increase but it’s possible if your income increases.  But, this is the “problem” we like to see! And, we try to adjust our withholding so we never have to give up any of our tax refunds.

Life During Chapter 13

Because the chapter 13 is a long term plan, it’s not uncommon for issues to arise that might impact your plan. That’s why you want to use a law office with a large and experienced staff. (Our office has 6 full time paralegals and 4 full time attorneys who help make sure we always provide the support our clients need).

Most of the time, your chapter 13 has absolutely no impact on your normal life’s activities.  You can go on vacation, change jobs, move to another state, get credit cards, and even buy a house while you are in an active chapter 13 case.  There are very few restrictions.

Your creditors cannot call you, sue, or even send you a bill!  They are under the control of the bankruptcy court.  Life returns to normal for most, and the stress and pressure from financial problems quickly disappears.

Because every case has a family budget built into the calculation, many people have more money to cover their monthly living expenses than they had before they filed.  Money that used to go to pay unsecured debt is now free to pay for the family’s needs.

Is Chapter 13 Worth It?

his is a question a lot of people ask.   They have heard stories about how hard it is to be successful with a chapter 13.  And, the truth is that some do find it to be challenging.  I’ve been filing chapter 13 cases for thirty years and have one if the highest success rates in the entire country.  I believe that many people who struggle with chapter 13 do so for two main reasons.

First, people in chapter 13 often need support from their attorney.  The attorney’s guidance and advice can keep a case on track and provide valuable direction to clients, keeping their case on track.

Second, we all can agree that sometimes life throws us unexpected challenges.  This is true for people in chapter 13 too.  And, in a chapter 13, you don’t have the option to go out and borrow large sums of money.  Sometimes this is a problem.  But it would also be a problem for anyone NOT in a chapter 13.

Is chapter 13 worth it?  The overwhelming majority of my successful chapter 13 clients would answer with an enthusiastic YES!  They keep their homes, sometimes saving them from loss through foreclosure.

From Huber Heights and cities north, to Springboro and Miamisburg in the southern part of the Dayton District, our clients report satisfaction with the successful reorganization they achieve with chapter 13.  They keep their cars, and all their other property as well.

They pay back what they can, although often it’s only 1%.  It’s still something, and it’s their best effort.  It’s all they can afford and this is all the law requires.

Chapter 13 Frequently Asked Questions

Is Chapter 13 Bankruptcy right for you?

It depends.

First, look at your big picture. What are your biggest problems?  What do you need now, and what will you need in the next few years?  What are your short and long term goals?

Trying to figure out what tool to use, 7 or 13, before knowing exactly what you need to accomplish, is foolish.

Forget about the means test that you read about when searching for information about Chapter 13, bankruptcy exemptions, median income charts and all of the other bankruptcy snippits that pop up on the Internet when you search for bankruptcy information.


Many attorneys are NOT well versed in the intricate details of Chapter 13 bankruptcy.

Some attorneys who advertise “Bankruptcy” as one of their (sometimes many, jack-of-all-trades comes to mind) practice areas won’t even offer to file a Chapter 13.

(Our office files more Chapter 13 cases than any other office in Southern Ohio.)

Chapter 13 is an amazing tool.

If used properly, it can do many things for you.

Depending on your circumstances (required legal disclaimer language), it could:

  • Save your home from foreclosure, even after the lawsuit is filed, so long as your house is not yet sold.
  • Lower your car payment, by reducing the interest rate.
  • Let you keep your car and pay only what it is worth, not what you owe
  • Pay as little as 1% to all your unsecured creditors, like credit cards, medical bills, etc, which is just about like a chapter 7, which pays 0%. Practically the same.
  • Let you stretch out your payments over 3 to 5 years, so you have a balanced budget.
  • Actually let you have a BIGGER household budget than you have now, while keeping all your property – lose nothing, and have more money in your pocket.
  • Put student loan debt “on hold” by placing your loans in a state of forbearance (disclaimer, interest continues to accrue and student loan debt is almost never discharged in bankruptcy).

How does all this sound?

Chapter 13 bankruptcy can help you in ways that you simply cannot accomplish in chapter 7, or you may need to file chapter 13 because you are not eligible for chapter 7.

Many attorneys will tell you that if your income is “above the median income threshold” you have to file Chapter 13.

This is not true.

You can be above the threshold and still “pass” the means test.

Many attorneys will tell you that if your income is below the median income threshold, you should file a chapter 7.  Just “wipe it out and get it behind you and start fresh.”

Again, this is not necessarily what is best for you.

Sadly, I see a lot of folks file chapter 7 without even considering what a chapter 13 could do for them.  I can tell when I see their cases at trustee meetings.

So, they end up keeping “upside down” cars with high interest rates.

This hurts them financially.

Not the way I like to see someone’s “fresh start” begin.

I see people making the mistake of letting their house go to foreclosure when they could have kept it, and sometimes even eliminated their second mortgages through Chapter 13’s “lien stripping” process.

Eliminating their debt, only to have to go right back into debt to replace cars they surrender, normally at high interest rates, is wrong.

Being forced into bad loans with their credit ruined because they did not get proper counseling on how to recover their credit, is wrong.

And the list goes on.

This is the critical question I want to discuss with you.

Can you, at your current income level, take care of your own needs, and those of your family, for housing and food and basic necessities and, with what’s left over, can you pay off your debt in a reasonable time?

What is a reasonable period of time?

Usually 3 to 5 years.

If you can honestly say that if you cut back on your spending and carefully maintained a budget you would be able to pay off most of your debt in 3 to 5 years then great!

However, you should keep going… ask yourself if you could accomplish your goal EVEN FASTER, if you used bankruptcy as a financial recovery tool – you may want to file bankruptcy even if you COULD avoid it – if the results are better.

On the other hand, if the honest answer to this question is “no,” then probably a bankruptcy, either Chapter 7 bankruptcy or Chapter 13 bankruptcy, should be given serious consideration.

Who files Chapter 13?

Lots of people file chapter 13.

Young. Old, lower income, and higher income.

Doctors, lawyers, (I filed a Judge once), business executives, just about anyone might need to file a chapter 13 for lots of reasons.

I file people in Chapter 13 with incomes of over $100,000, or as little as social security income of only $1,500 per month.

A typical Chapter 13 bankruptcy filer could be single, or married with kids. Could be buying a house worth $250,000 or could be renting.

Her cars might be paid for or she might be making car payments.

Often, people who file Chapter 13 bankruptcy do not have higher incomes that people who file for Chapter 7.

They have similar expenses, car payments, mortgage payments, and all of the other issues that we all face.

And, many of my clients like the fact that they are actually paying some of their debt back, based on what they can afford, and that gives them a tremendous sense of satisfaction because they are making their best efforts to be responsible and pay what they can afford.

Do you qualify for Chapter 13 Bankruptcy?

First, please try to ignore (for now) the means test.

If you are searching on the internet you will see the means test come up time and time again.

It’s more important in Chapter 7 than Chapter 13.

If you want detailed information on how it REALLY works, see my Ultimate Guide to the Means test.

Don’t spend too much time studying the means test because in chapter 13 it works in a very different way than it does in Chapter 7, and at the end of the day, the outcome of the means test in chapter 13 bankruptcy is often irrelevant.

You don’t pass or fail the mean test in chapter 13 like you do in chapter 7.

Most people qualify for chapter 13.

If you have regular income, and this could be from unemployment, social security, pension or retirement income, your job, your business, or even regular support from your family, you will probably qualify.

Sometimes, due to having already filed a bankruptcy, people only qualify for chapter 13.

Bottom Line: most people qualify for chapter 13.

And, I strongly believe that everyone who is considering chapter 7 should also do a complete analysis of the benefits of chapter 13 as well, since there are often good reasons to file chapter 13 even if you do qualify for chapter 7.

Debts discharged in Chapter 13 bankruptcy.

Medical bills

For a video of this topic, go to Discharge Medical Bills in Bankruptcy

Often, medical bills are the main reason for filing Chapter 13 bankruptcy.

The good news is that Chapter 13 bankruptcy does not disqualify you from ever going to hospital emergency rooms for necessary treatment and continuing to see your doctor.

Hospitals and laboratory bills are regularly discharged in Chapter 13 bankruptcy and I’ve never known anyone to have difficulty getting necessary lab work done even if they have filed bankruptcy on the very same hospital or laboratory that they now seek to use.

Emergency rooms will not refuse to treat you simply because you have discharged a debt to the emergency room in a Chapter 13 bankruptcy.

In fact, the emergency room generally doesn’t even know if you’ve filed bankruptcy or not.

Private Doctors are another story.

If you’ve been treating with a particular doctor and owe the doctor money when you file Chapter 13 bankruptcy, I generally suggest that you contact the doctor’s office, and talk to the doctor himself or herself.

My experience is that if you contact your doctor prior to filing bankruptcy and try to make arrangements to make payments on these debts then you will continue to be able to see that doctor.

You should know, however that the doctor is not required to continue to see you – but often they will.

If you owe a debt to a doctor, this debt must be listed in your Chapter 13 bankruptcy. You are not permitted to exclude any debts, including your doctor.

The doctor is not permitted to try to collect the debt you discharge in bankruptcy but you are permitted to voluntarily pay it. And this is what most of my clients do.

Credit Cards and Personal Loans

The most common kind of debt discharged in a Chapter 13 bankruptcy is credit card debt.

This accounts for more Chapter 13 bankruptcy cases than any other single kind of debt. Personal loans, signature loans, loans not secured by any personal property, are all discharged in a Chapter 7 bankruptcy without any payment whatsoever.

Of course, the credit cards and open loan accounts will be closed when you file, but credit cards are so easy to get that this should not be of concern to you.

Collateral loans

These are the kinds of loans that you get from places like Eagle Loan, One Main Financial and Springleaf, formerly Beneficial, Household Finance, and American General.

These are high interest loans and generally these finance companies require you to fill out a form that lists personal property that is used as security for the loan.

I’ve actually had my clients tell me that when applying for these loans that the people working at the finance company put down property that they did not even own.

Theoretically, if you don’t pay these loans, the finance company can repossess these items.

This is a seldom done, as a practical matter. In fact, I’ve had clients try to surrender the property because they wanted to discharge the debt and feel that they treated the creditor fairly, since they did pledge the property as collateral, only to have the creditor refuse to take the property back.

Unlike Chapter 7, where you have limited options for these kinds of collateral loans, in chapter 13 you are able to keep the property, and you only have to pay the value of the property, in most cases, which is often much less than what you owe.

This is called a “Cram Down.”

For example, if you borrow $10,000 from Springleaf and you used your car for collateral, you must pay something to Springleaf in order to keep the car in a Chapter 13.

However, in chapter 13 you are able to cram down what you owe, in other words, you only have to pay to Springleaf to the value of the car. This means that you can pay spring leaf $4000, and keep the car.

The remaining $6000 that you owe Springleaf over and above the value of the car is treated like a credit card or medical bill in chapter 13, an unsecured debt.

In most cases, the Chapter 13 cases I file pay very little, often one cent on the dollar, so basically you would pay $60 to Springleaf to discharge the $6000 unsecured portion of the one.

And the interest rate will be lowered to 6.5 to 7% (as of January, 2019) as well, saving you even more money.

Title Loans

It is a shame to see people who can least afford the very high interest rates charged by these lenders suffering and paying out money they really need for living expenses because they are afraid their car will be repossessed.

And, in fact, the title loan companies do repossess cars. These are probably some of the most dangerous and frustrating loans that I see.

Because everyone needs their car for just about everything they do in daily life, the threat of not having the automobile is huge.

Although the debt owed to a title loan company is dischargeable, because they have a security interest in your car, they can actually take your car if you don’t pay the loan.

In chapter 7 cases, we often try to pay these loans off before filing our bankruptcy. But this is often difficult and sometimes impossible.

You don’t need to do this in a Chapter 13.

In a Chapter 13 you can pay back the title loan over a period of 36 to 60 months.

And, the interest rate will be changed to about 7%. !!

In most of the cases that I see, the title loan people are pretty smart.

They generally won’t loan anyone much more than the value of the car. If you have borrowed an amount that exceeds the value of your car then you can cram down the loan just like you can with the collateral loan.

Either way, Chapter 13 is a very effective tool to use against title loans

Payday Loans

Payday loans are dischargeable in Chapter 13 bankruptcy.

Even though these lenders have you sign documents that seem to indicate that these loans would not be dischargeable in bankruptcy, they are, in fact, dischargeable in a Chapter 13 bankruptcy.

Although there is a provision in the bankruptcy law that says that cash advances adding up to more than $825 made within 70 days prior to filing are presumed to be non-dischargeable in chapter 13 bankruptcy, in practice I have yet to see a payday loan creditor file anything in any of my cases requesting that their debt be paid.

Typically, these payday loan creditors will require payment by automatically deducting the money from your bank account where your paycheck is deposited.

They like to time the payments so that the loan payment comes out very same day your paycheck is deposited.

This makes it virtually impossible for you to take the money out of your bank account prior to the automatic payment on the payday loan being made.

Occasionally payday loans are paid by check, typically a post-dated check that the payday loan creditor is supposed to hold and deposit on a certain date.

If you try to put a stop payment on these payday loans they are generally successful in avoiding the stop payment and end up getting the money anyway.

As you might expect, they’re very experienced at this. There is a particular way that I generally advise my clients to avoid payment on the payday loans that has worked very well.

Of course, once you file a bankruptcy case, you stop making payments on these loans too.

In chapter 13, payday loans are treated just like any other unsecured loan, like a credit card, or medical bill.

Once you file your Chapter 13 bankruptcy, the payday loan lender is not permitted to further access your bank account.

Cramdown of cars in chapter 13.

When can you pay less for the car than you owe on it?

A powerful feature of Chapter 13 is the ability to cram down the debt that you owe on automobiles.

The “cram down” is a term used to describe how you can pay a creditor only the value of your automobile even though you may owe much more on it.

For example, if you have a car is worth $6,000 and you owe $10,000 on it, when you cram this car down in a Chapter 13 you only pay $6,000 as a secured debt, and the interest rate will be 7%.

The $4,000 that you owe on the car over and above its value is treated like an unsecured debt, like a medical bill or credit card. Because in most cases we only pay a penny on the dollar, essentially you are only going to pay $6,000, the value of the car, even though you owe $10,000 on it.

Bankruptcy law does not permit you to cram down all car loans, however.

The car has to be purchased more than 910 days (about 2 ½ years) prior to the filing date of your bankruptcy. This means that we need to be very careful in choosing the filing date.

You wouldn’t want to file your bankruptcy only 909 days after the car purchase date, because this would mean you would have to pay the full amount that you owe on the car.

In our example, you would have to pay $10,000 for the car, the interest rate would still be lowered to 7%, but you wouldn’t be able to cram the car down.

The car has to be purchased more than 910 days prior to your filing your bankruptcy case. So, by waiting a day you will save $4,000.

Little details like these make a big difference.

Real Example:

Attention to details matters.

Once I had a client come to me in a big hurry to file.

He had a good reason to be in a hurry.

His wages were being garnished and he asked me to file his case at once to stop his garnishment.  He knew the bankruptcy filing would instantly stop the garnishment.

But, I never get in a hurry and fail to do a proper analysis.

When I pointed out to him that if we just waited 4 more weeks, we could save him about $8,500 by cramming down his car, he was very grateful for my careful analysis.

And, he was happy to let his garnishment continue for 2 more paychecks.

The amount of money he lost to the two extra garnishments was not too much, especially compared to the $8,500 I saved him on the car.

Even if you can’t cram down the automobile, there is still a great benefit to paying for automobiles in chapter 13. In many cases, my clients have high interest loans on their automobiles.

Perhaps the automobile is worth close to what they owe on it but their interest rate is 24.99%.

By putting the automobile and the bankruptcy they will save thousands of dollars in interest charges.

Getting a car after bankruptcy (or before bankruptcy)

Sometimes you know that you’re not going to keep your car. You want to send it back to the creditor and be done with the car and the debt on the car.

The car is, perhaps, in bad condition and so for that reason you don’t want to keep it. You probably owe more on it than it’s worth anyway.

But, we all have to have a car, don’t we?

In these circumstances, you would buy a car before filing, and although you cannot cram down the car, since the purchase date will be very recent before you file your bankruptcy case, you still get the benefit of changing the interest rate to 7% which is normally a lot less than what you end up paying for a car before you file a bankruptcy case.

Your old car will go back to the creditor, who will sell it at auction, and the difference is treated like a medical bill or credit card in your chapter 13, often paid at only 1%.

Apartment leases, do you want to stay or go?

Filing bankruptcy will not cause you to lose your apartment lease.

The apartment must be listed because it’s actually debt that you owe.

You will state in your Chapter 13 bankruptcy petition that you’re going to keep the lease and continue to make payments.

If you don’t make payments of course you can be evicted just the same as if you were not in bankruptcy.

But the bankruptcy itself will not cause you to be evicted so long as you’re current on your rent payments.

On the other hand, sometimes it’s you’re better off breaking the lease and moving somewhere else.

If you had a loss of income or divorce or some other setback and you need to get out of a lease that you could no longer afford, Chapter 13 bankruptcy will allow you to move out, break the lease and discharge the remaining payments, including, generally, any damage claims that the landlord might later want to bring against you.

The standard practice for doing this would be to move out of the apartment before you file bankruptcy, and then include the lease debt in a Chapter 13 bankruptcy to be discharged.

A very common question and concern everyone has when considering filing Chapter 13 bankruptcy when they are renting is whether or not they will be able to find another apartment to rent.

Fortunately, this turns out to be not a problem at all.

I filed thousands of cases and I can tell you that it is a very, very rare occasion to hear anyone tell me that they’ve had any difficulty finding a place to live, wherever they want to live, because of a Chapter 13bankruptcy.

What if you are in the process of being evicted?  Will Chapter 13 help?

Generally not.

If you are being evicted because of non-payment of rent, you cannot use chapter 13 to “catch up” the rent and force the landlord to drop the eviction.

The automatic stay, which “stays” or stops all civil actions, including evictions, can be circumvented by the landlord, on application to the bankruptcy court, and the eviction will be delayed but permitted to resume in normally a very short time.

Keeping your house


There are many advantages to using Chapter 13 when it comes to mortgage debt.

Although you can’t change the interest rate on a mortgage like you can with an automobile, you can sometimes totally eliminate second or third mortgages and have them treated as an unsecured debt, like a credit card or medical bill.

Also, you can remove judgment liens that may have been attached to your house because you were sued.

It is not uncommon for real estate to have dropped in value after a second mortgage is taken out.

If this applies to you, then this could be a real “Game Changer.”

Houses with second mortgage payments may be more than some could afford, but if the second mortgage was “stripped off” and the payment eliminated, the house you couldn’t afford suddenly becomes affordable.

If this applies to you, then a chapter 13 bankruptcy could be just what you need even if you can handle all your other bills and have never missed a payment.

Keeping Your Options Open with Chapter 13

Not sure if you want to keep the house?

Expecting a change of circumstances, like kids graduating and leaving home?

Thinking you may get laid off, switch jobs, want to transfer, and may not be able to sell your home for what is owed on it?

Chapter 13 may be able to help.

That’s right. You’re options are open.  You can change your plan.

You could file a Chapter 13 with your initial stated intent to be to keep the house.

You can see how that works with your budget, and if everything works out as planned and you still want to keep the house, then your Chapter 13 will do just that for you.

But what happens if, while you’re in the middle of your Chapter 13 plan, you have a change in your life circumstances?

Maybe you change jobs or you get transferred or divorced.

You have options!

With Chapter 13 you are not locked into your decision.

You can file your plan to keep the house, and if it works out fine – but if you change your mind I can modify your plan to drop the house out of the plan and discharge the deficiency.

This way, when you end your Chapter 13 and get a discharge of all your debt, the house deficiency will be discharged as well.

And, if you do change your mind in the middle of the plan, you still are able to live in the house for a period of months while the foreclosure is taking place.

Land Contracts in Chapter 13

What if you’re buying a home on a land contract, or selling one?

If you’re buying a home on land contract, this is considered an interest in real estate. This interest in real estate is protected by the residential real estate exemption. If you’re selling on a house on land contract you don’t have any residential exemption (and it and there is no protection for any equity that you may have in the contract, either).

Chapter 13 provides you with several options if you are purchasing your home on a land contract or if you are selling well.

Often, if you are purchasing a home on the land contract, the contract will require that you pay the full purchase price only a few years after you enter the contract. This is called a balloon payment.

With Chapter 13, it is possible to extend the time within which you must pay off this contract by up to five years. Of course, you still have to pay the total amount due and may be difficult to obtain financing a Chapter 13 but it is possible and we have done this on several occasions.

Therefore, if you are selling a house on land contract later on you are entitled to receive money because of a land contract – the money that you would receive on a land contract could be lost in a Chapter 7. Therefore, you might want to consider filing a chapter 13, which would give you more options to deal with the contract than are available in a chapter 7.

Credit Unions

Credit unions deserve special mention.

Credit unions are very easy to deal with, and it’s sometimes easier to get loans from a credit union than a bank. Credit unions provide car loans, sometimes mortgage loans, credit cards, personal loans and frequently the credit union is the only banking institution that families may use.

The difficulty that sometimes arises with a credit union when you file a Chapter 7 bankruptcy is the concept of cross collateralization.

That’s a legal concept that means that the credit union ties all your loans and collateral, if any, together.

So if you have a car loan, credit card, and a personal loan, then all of these loans are generally going to be secured by your car.

So, if you get behind on your credit card payment – surprise! – Your car can be repossessed.

When this happens, you are taken by surprise because, after all, you’re current on your car payment. “What’s up? Why did you clean out my bank account, and repossess my car? I only missed my credit card payment! My car payment is current!”

You even take it directly from my account! (Expletives deleted)

The credit union then explains, often for the first time, that the credit card is secured by the car, personal loan is secured by the car, and if any of these payments become late they have the right to take money out of your bank account, checking, savings, without warning and repossess the car.

And, they frequently do all of this at the same time causing you to bounce checks and have to pay repossession fees.

It’s a very hard way to learn about the concept of cross collateral station.

Cross-collateralization frequently causes problems in a Chapter 7 bankruptcy.

This is because often you will have a credit card, a personal loan, and the car that you want to keep in a bankruptcy but you want to discharge (with no payment) the credit card and personal loan while keeping the car.

The credit union will often not agree to this.

In fact, credit unions almost never agree to this.

The credit union will not agree to allow you to keep the car, unless you also agree to pay back the balance on the credit card and personal loan.

Often the amount owed on the credit card personal loan and car loan far exceeds the value of the car.

Because there’s no way to force the creditor to allow you to just reaffirm the car in a Chapter 7 bankruptcy, we often will return the car to the creditor and allow them to repossess it – sell it – and discharge all the debt with no payment.

Chapter 13 offers you an option to deal with the problem of cross-collateralization.

A Chapter 13 is said to “break” the cross-collateralization.

So, for example, if you have an automobile loan, a credit card, a personal loan with a credit union, you can actually keep the car and only pay the credit union the value of the car, or the amount owed on the car (depending on how long ago you purchased the car, and depending on whether the debt owed was to purchase the car, or if the car was just collateral for a loan).

Cosigners in Chapter 13 Bankruptcy

If you have a cosigner, typically a family member, you, and your co-signer need to understand that the cosigner has only limited protection in a chapter 13 bankruptcy, in most cases.

If you are paying back 100% of your debt in your chapter 13, then your cosigner is protected. But not too many cases pay back 100%.

If you are keeping the collateral on a secured debt cosigned by someone, they are still liable for a portion of the debt which is discharged in your chapter 13.

The creditors will sometimes even ask for the court’s permission to go after the cosigner for the difference. This can be a complex problem and one best left to a very experienced chapter 13 bankruptcy attorney.

Sometime you are the cosigner for a debt that is being paid by someone else. For example, you may have cosigned for a child who needed a cosigner for a car and the child is paying for and driving the car.

In this case, we will want to discharge your obligation without affecting the child’s car or credit. There are special plan provisions we use to take care of these situations. They are not uncommon but must be properly handled so everything goes smoothly and the cosigner is not affected.

Cosigners are required to be listed in your bankruptcy and will be notified by the bankruptcy court. So if you have a friend or family member who is a cosigner one of your debts, you’ll probably want to tell that cosigner about your bankruptcy filing before you actually file the case because you don’t want the cosigner to first learn about your bankruptcy filing by getting a court notice in the mail.

Discharge Utilities in Bankruptcy

Past-due utilities are discharged in chapter 13.

These are unsecured debts and are discharged just like a medical bill or credit card.

Sometimes the utility company will make you pay a security deposit just as if you are a new customer. If you have a security deposit on file when you file the bankruptcy, the utility is permitted to keep that security deposit and apply it to the balance that you owe when you file.

Sometimes your utilities are not behind, but yet the utility company may still discharge the unpaid balance that you owe on the date of filing. This is not done in every case but technically the utility company is correct in doing this.

For example, if your utility bill is due on the 30th and you file a bankruptcy on the 15th, approximate one half of your monthly utility bill would actually be dischargeable in bankruptcy.

Even if you don’t list it to be discharged in bankruptcy, the utility company will sometimes take it upon itself not bill you for the amount of usage that you had prior to the day that you file your bankruptcy case.

Student loans – generally not discharged in bankruptcy

Generally, student loans are not discharged in bankruptcy. This is true of both federal and private student loans. It is technically possible to discharge student loans in bankruptcy but it is very difficult.

You essentially have to show that you cannot now and probably never will be able to in the foreseeable future pay all or a significant portion of your student loan debt.

The way I like to explain the difficulty involved in discharging student loans in bankruptcy is like this: if you can walk into the courtroom to make the argument that your student loan should be discharged – you have probably already lost your argument.

The reason is because you were able to walk into the courtroom to make the argument in the first place.  Meaning that you probably could work and pay at least some of the debt.

Many student loans are guaranteed by the Government. Essentially you are suing the United States of America and the success rate for these kinds of cases is very low. I will not take on a student loan discharge case as a rule because of the low success rate, I don’t want to charge my clients money for what will probably be a loser case.

If your situation is such that you really can’t pay and you are disabled, you should know that there are non-bankruptcy ways to get the student loan forgiven.

Bankruptcy Places Loans into Forbearance

Sometimes we have to file Chapter 13 just to obtain protection from student loan creditors for three to five years.  During this time, your income may increase and the combination of increased income and discharge of other debt will put you in a position where you will be able to make payments on the non-dischargeable student loans.

Chapter 13 helps by “Sequencing” debts

Most of the time, we have a mix of normal, dischargeable debts, and student loans.

Chapter 13 provides a very effective way to pay what you can afford.

Your chapter 13 payment goes to all unsecured creditors equally, student loans included. At the end of the case, the balance owed on the medical bills and credit card debt is gone forever. Any car debts are paid in full, and then you are usually in a better position to get into a payment plan on the balance left on your student loans.

Rent to own debt is discharged in bankruptcy

Rent to own debts are dischargeable in bankruptcy. However the contracts for these rent to own generally require that the property be returned to the rent to own creditor if you discharge the debt. These are generally very bad deals for consumers and I almost always advise against keeping rent to own debt.

Occasionally, I will find someone who has just about completely paid off the rent to own contract and it doesn’t make any sense to turn the property back over since it’s almost paid for.

In these limited situations we generally will use a special plan provision in the chapter 13 bankruptcy to keep the rent to own property and continue to pay until the contract is completed.

Will I lose my tax refund in bankruptcy?

Tax refunds have limited protection in a Chapter 13 bankruptcy. As a general rule people to keep $3,000 of their refund, but if there is Earned Income Credit, or Additional Child Tax Credit but not the Child Tax Credit itself) that is above the $3,000 limit, you keep the larger EIC and ACTC amount.

And, tax refunds get examined each year in a chapter 13, since the plans run for 3 to 5 years. So, it makes sense to adjust your withholding to minimize the refund, and that way you will get to keep it. Also, by adjusting your withholding, you will maximize your take home pay, and that is a good thing for anyone’s budget.

Will I lose property if I file bankruptcy?

Most people today realize that you don’t lose everything in a bankruptcy.

They may not know how much they’re going to be able to keep, but they do know that they are not going to lose everything. And this is true.

In chapter 13, most people don’t lose anything.

In fact, in those situations where there is value in property that would be a problem in chapter 7, filing a chapter 13 is just the thing to solve this problem.

You get to pay a reduced amount to compensate the creditors for the property you keep, and you get to pay the reduced amount over 3 to 5 years, at no interest.

Most of the “stuff” that we own has very little, if any, practical resale value.

Everything that we own is used, and although its replacement cost may be significantly more than $10,000 – this is not the test.

The valuation test is the resale value in its current used condition.

Therefore, generally, everything that we own is fully protected in a bankruptcy.

Yet, some property is not protected in bankruptcy.

For example, if you have stocks and bonds, they generally are not going to be protected. A common example of this is employee stocks. I’ve had people who would be excellent candidates for Chapter 7. But they find, to their dismay, when we look up their stock that they have about $20,000 worth of stock in their company account.

They don’t want to lose it so we use chapter 13 to keep the stock, and pay something to their creditors to compensate for keeping the stock from being lost to a chapter 7 trustee and liquidated.

Your Retirement is protected

Most retirement accounts are 100% protected in bankruptcy. There are some exceptions to this rule. Generally, your retirement account will be through your employer and these are almost always protected.

Possible exceptions include situations where you may be putting aside money in a mutual fund and your intent is to use this mutual fund for retirement at a future date.

You think of it as a retirement fund because that is the use for which you have set this fund. However, mutual funds are sometimes not protected retirement accounts.

So although you may think of this account as a retirement account – but is not legally protected and would be subject to being taken by the trustee if you file Chapter 7 bankruptcy.

Also, retirement accounts that are inherited are not protected according to a recent court ruling.

Bankruptcy hearings. Do I go to court?

First of all, you will probably not go to an actual court hearing.

Bankruptcy meetings are generally held a meeting room in front of a trustee, not a judge.

The purpose of the meeting is to have you personally verify that the information in the petition is true, complete and accurate.

And, there are certain questions that the trustee has to ask, by law, like if you owe child support, have the right to sue anyone, have you lived in the jurisdiction for the last two years, and so on.

Nothing scary.

We’re prepared, and we prepare you for the meeting.

Most of time, my clients look to me after the meeting and say,

“Wow, that was easy!”

When you prepare properly, it should be.

We do.

Credit after bankruptcy – Getting a real fresh start

They say bankruptcy is a fresh start, and I agree.

But it’s just a start.

We will all agree that you need to finish what you start.

But bankruptcy alone doesn’t do this at all.

How does your attorney help you out after the bankruptcy?

Well, the truth is, most attorneys don’t, in fact I know of no attorney in Ohio who has a formal program of credit rebuilding and credit report correction like mine.

I’m the only attorney in Ohio who is a certified credit counselor, board-certified bankruptcy specialist and a certified debt arbitrator. These non-attorney designations and the Board certification which is recognized by the Ohio Supreme Court, means that I do much more than just file bankruptcy.

I help you to recover your credit.

Sadly, none of this is taught to attorneys at law school.

You’ve probably heard that bankruptcy will stay on your credit can ruin your credit for 10 years.

Unfortunately, there is sometimes truth to that statement.

If you don’t do anything after bankruptcy filing to improve your credit and clean up your credit report, you could expect to have poor credit for a long time.

But this isn’t carved in stone.

You can do better.

I found that by following a specific course of action after filing bankruptcy that I can generally help you to achieve credit scores of 650 and higher.

We can clean up your credit report, so you can buy cars at decent interest rates and even purchase houses only a few years after your bankruptcy discharge.

However, this doesn’t happen by itself.

You deserve a fresh start, a real financial recovery.

You want a successful outcome, you need financial reorganization.

Don’t take chances.

Bankruptcy is a complex specialty area of the law.

Your attorney should ideally be a board certified specialist.

You wouldn’t go to a general practice doctor for brain surgery or anything else that was very important.

You shouldn’t trust a once-in-a-lifetime financial reorganization to a jack of all trades attorney who is not a certified specialist.

Credit reporting after bankruptcy

Did you know that millions of dollars of debt discharged in bankruptcy is actually paid by consumers every year? It’s true. Creditors often fail to update information on your credit report after you file bankruptcy.

Legally, after a bankruptcy discharge, you do not owe these debts.

But, sometimes, it appears on your credit report anyway, as if you did still owe it. Creditors often take the position that they are not doing anything wrong because they are not reporting that you owe the debt.

They’re not reporting anything, they say.  They stopped reporting.

How do you make them fix this problem?

There is a way to dispute is properly and I’ve built this into my bankruptcy practice.

Sometimes people want to use credit repair companies to clean up their credit report after bankruptcy and help them recover their credit.

I can’t speak for the overall success rate of any company, of course, but I can tell you that my clients report to me that they have not enjoyed much success with these kinds of companies.

Often times, I am told that they use a “shotgun” approach to dispute everything on a credit report in hopes that will do the trick.

I found my own experience that that’s probably not the best way.

I prefer to use a scalpel, not a shotgun, and individually analyze every single credit report carefully.

Then, I only dispute the items that are both incorrect and hurting my clients. In fact, careful examination of many credit reports reveals that some errors are actually favorable to your credit score.

Of course, it takes more time to individually analyze a credit report than it does to just dispute everything on it all at once. But the results are much better if you take the time to do it right.

How long will it take you to recover from bankruptcy?

That depends on the approach that you take after your bankruptcy discharge, of course.

Many people tell me that they intend to follow a “cash only” lifestyle.

They don’t want to get in trouble again, they tell me.

While there is some attraction to this way of thinking, it’s a bad idea if you want to rapidly rebuild your credit.

You have to use credit properly in order to improve your credit score.

Having no credit, living a “cash only” life, will hurt your credit score.

Going after too much credit too quickly, and using it improperly, will also hurt your credit.

What you need is the right approach.

There’s definitely a right way to do this.

If you follow my approach, you should be recovered from your bankruptcy after about one year.

You should be able to get car loans at interest rates that are good and in 3 to 4 years you should be able to qualify for a real estate mortgage, provided that you make enough money to qualify. In other words, the bankruptcy will not hold you back.

More people should be filing chapter 13 than realize it.

Many people think that being able to file Chapter 7 is better than “having to file a Chapter 13.”

In fact, when I counsel people who are interested in filing Chapter 7 bankruptcy and I determine that they’re better off filing a Chapter 13, they sometimes seem disappointed.

Many people ask, “Is it better to file Chapter 7 or Chapter 13?”

It’s actually not that simple. Chapter 7 is not “better” than Chapter 13. Chapter 13 bankruptcy is not “better” than Chapter 7 bankruptcy. The question really is “what Chapter is best for your needs?”

There are many situations where I find that people who qualify for Chapter 7 bankruptcy are much better off in many ways by filing a Chapter 13 bankruptcy.

And, sadly, some attorneys are not comfortable filing Chapter 13 bankruptcy because it is more complicated and complex.

There’s another reason why some attorneys don’t want file Chapter 13 bankruptcy.

Chapter 13 bankruptcy requires a commitment by the attorney to support the client for 3 to 5 years.

Many attorneys simply don’t have the staff, the time, or the desire to partner with the client for that length of time to help that client achieve a complete financial reorganization.

Some have actually told me, privately, that they’re more concerned about profit – and would rather file chapter 7 cases, quick in, quick out, and move on.  They don’t see the value in a long-term relationship with and commitment to, the client.

I’m just the opposite. I want whatever is best for you.

And if that turns out to be a Chapter 13 bankruptcy, then I will support you for the full five years and beyond to help you recover your credit afterwards.

And we have the largest “bankruptcy only” office in Southern Ohio.

For more than 32 years, I’ve been focused on helping people get out of debt, and get a full financial recovery.

Before filing, don’t do these things!

If you’re thinking about filing Chapter 13 bankruptcy, is a good idea not to make any large or significant financial transactions prior to seeing a bankruptcy specialist.

Don’t liquidate your retirement plan, don’t transfer property out of your name, and don’t pay any creditors off above or beyond the normal monthly payment.

It’s usually a bad idea to buy property prior to filing a bankruptcy, although in some cases I have advised people to buy automobiles before filing because as a practical matter it’s easier sometimes to get credit before you file a Chapter 13 instead of waiting until after you file.

In fact, when we plan to file a chapter 13, we usually spend a lot of time talking about automobiles. I want you to get the best results, and to do this we need to look at the big picture, not just your bills and income.

Let me give you an example.

Because of my reputation, I do a lot of second opinion consultations.

(I also have attorneys call me to help them analyze their cases)

People come to me after they see another bankruptcy attorney initially because they were not convinced that the attorney was the right one for them. It just didn’t “feel right” they tell me.

All too frequently, they tell me that the attorney essentially plugged all their numbers into a formula and gave them a payment plan in chapter 13.

This is a simplistic and potentially dangerous approach.

Yet, I can see at trustee meetings that this happens all the time.

The clients never know it.

There’s no way for them to know what “could have been.”

And, I know that there is a very good chance that they’ll run into problems later on in the plan, as a result of what “didn’t happen” before their case was filed, due to a lack of planning.

I am very concerned about your future recovery.

Your success is important to me.

If I see that you have an older car, or an automobile that is simply a horrible deal, very upside down and overpriced, I know that we probably need to discuss the possibility of making some changes before we file Chapter 13.

After all, we will be in a 3 to 5 year plan and we need dependable transportation for the entire 3 to 5 years and beyond.

In many cases, a little bit of time spent up front considering different options to replace these automobiles before we file Chapter 13 can make the difference between a successful outcome, and a plan that fails partway through.

In these cases, looking at the big picture helps me to ensure that my clients are going to have a successful Chapter 13 outcome.

This is why the vast majority of my cases have successful outcomes, something that cannot be said of many other offices

Because I’ve been a bankruptcy attorney in Dayton Ohio for so many years, I’ve seen a lot.

Experience is a great thing to have.

On my website I have an entire page of things to avoid before filing bankruptcy.

Richard West

About the author:

Richard West is a Board Certified bankruptcy specialist and certified credit counselor with over 33 years’ experience. He exposes the half-truths and misleading information you’ll find everywhere on the web. West helps people achieve freedom from financial failure, wipe out their debts and quickly recover good credit.