Keys to a Successful Chapter 13 Reorganization
In a Chapter 13 bankruptcy — also known as a wage earner’s plan — a portion of the debtor’s outstanding unsecured debts are paid over a period of three to five years, with the remainder then being discharged. Chapter 13 is often an attractive option for debtors with steady incomes because it allows them to keep possession of their major assets. For example, a Chapter 13 can save a home from foreclosure. However, it takes good planning and fiscal discipline to successfully complete a Chapter 13 case.
Chapter 13 plans can fail for various reasons. Often, it is due to unforeseen circumstances that make it difficult to make plan payments. Sometimes the plan itself is not tenable. In many cases the debtor simply does not follow the plan. Following are some additional recommendations to maximize the chances of successfully completing a Chapter 13:
- Be prepared to surrender assets — Many plans fail because debtors try to save assets they can’t afford. For example, the debtor may own a home with a large mortgage that is seriously in arrears. Under a Chapter 13 plan, the debtor can pay off the arrearages over a three- to five-year period, but the regularly scheduled mortgage payments must also be paid. Even a refinanced mortgage may not be manageable. It may make more sense to sell the home and downsize to a more affordable one.
- Keep the plan realistic — Many Chapter 13 debtors create plans that substantially underestimate expenses. While people can control their consumption, they have no control over prices. The cost of necessities such as food and energy often rise and unexpected expenses such as car repairs or medical procedures can arise. If there is no wiggle room in the plan for price increases or unforeseen circumstances, then even the most well-intentioned Chapter 13 debtor can easily fall behind.
- Automate debt payments — To complete a Chapter 13 plan, the debtor must make all of the payments. In many cases the debtor, for whatever reason, spends money earmarked for plan payments on something else. The easiest way to prevent this is to set up automatic bank drafts for plan payments. Every month, payments are automatically deducted from the debtor’s account so those funds cannot be easily diverted.
- Be proactive — A Chapter 13 bankruptcy lasts for years and many things can go wrong in that amount of time. Temporary delays in or extensions to the plan are often possible. In more complicated situations the court may approve exchanging collateral for debt reduction to keep the plan alive.
The best way a debtor can keep a repayment plan on track is to seek the advice of a qualified Chapter 13 bankruptcy attorney.
With 12 offices across Southern California, the Law Offices of Michael Jay Berger is one of the largest bankruptcy practices in the region. If you are struggling with debt, feel free to contact us online or call 310-271-6223 to schedule an initial consultation.