How Does Chapter 13 Work? North Carolina Bankruptcy Explained

Chapter 13 misconceptions cleared up

Image Source: Flickr CC User Patrik Nygren

One common misconception we hear from North Carolina bankruptcy clients is that, in a Chapter 13 bankruptcy, the government pays off your debts and then you pay them back. This is NOT at all how Chapter 13 bankruptcy works. Here’s a quick rundown of Chapter 13 basics and what it can do for you.

In Chapter 13, YOU Pay Your Bills, Not the Government

No one pays your bills but you in a Chapter 13 bankruptcy. Your Chapter 13 repayment plan allows you to catch up on past-due balances on secured debt – such as your home or auto loan – while also paying your current monthly payments on these debts. The good news? All your unsecured debts (home, car, credit cards, medical bills, etc.) go into one pool, and while you must pay money towards them, you generally won't have to pay off the entire debt.

Chapter 13 Repayment Plans Last for Three to Five Years

A typical repayment plan is set up for a five-year term. During this period, you will be restricted in how much disposable income you may keep for yourself and most of your money will have to go to current living expenses, payments on your home and auto, and then a lump sum each month paid to the bankruptcy Trustee to help deal with your past-due debt balances. The payment may change annually.

If You Don’t Make Plan Payments, the Plan Is Canceled

Your plan payments must be paid promptly each month. If you miss a payment, you may be able to make it up, but if you fall behind more than one payment, the Trustee will ask that your repayment plan be dismissed and you will be back to where you were – in debt and behind on your bills. It is important to stick to a Chapter 13 plan once you commit to it and understand what happens if you don’t pay.

Chapter 13 Can Stop Foreclosure and Help You Keep Your Home

If you’re behind on your home and facing foreclosure, Chapter 13 may help save your residence. This can be important if you have equity in your home that you wish to retain. You will have to make your monthly house payment plus your monthly plan payment, which helps to catch up the past-due balance on your home. Chapter 13 can also be used to buy time to sell your home in a short-sale.

Chapter 13 Can Be Converted to Chapter 7

If you start with a Chapter 13 repayment plan then lose your job, your income drops, or you cannot afford the payments, you may be able to convert the case to a Chapter 7 which can wipe out unsecured debts including credit cards and medical bills. You must have income below a certain threshold or pass a Means Test to be eligible for Chapter 7. If you owe more than you can afford to pay, you may qualify.

You Need Income to Be Approved for Chapter 13

In order to qualify for a Chapter 13 repayment plan, you must have recurring monthly income that will allow you to pay your current bills as well as distribute money towards your past-due balances. If your income is insufficient to do this, Chapter 7 may be preferable. If you’re unemployed or on a fixed and limited income, you may not qualify for Chapter 13.

Find out more about the benefits of Chapter 13, Chapter 7 and which is better for your financial circumstances. Contact the Law Offices of John T. Orcutt for a free consultation today. Call +1-833-627-0115 now for a free consultation at one of our offices in Raleigh, Durham, Fayetteville, Wilson, Greensboro or Wilmington.