Why to file a Chapter 13

Katherine:

Hello everyone. Thank you so much for joining us today on This Needs To Be Said. Attorney Pete Moak is joining us today and he’s going to share with us some more information surrounding bankruptcy and some things that you may want to consider, if this is an option in your life, or you don’t know and you’ve been thinking about it. He’s here to give you some more insight so you can make a decision as well as find out how to get in touch with him outside of this interview. Welcome back, Pete, how are you?

Pete Moak:

I’m wonderful, how are you today?

Katherine:

I am doing wonderful. Let’s jump right into it as we’re talking about bankruptcy. I want to know, are there circumstances in which a chapter 13 bankruptcy would be a better choice?

Pete Moak:

Absolutely there are. One of the most common things that happen especially after the tremendous recession that we experienced, and are still coming out of, is the fact that many people have debts that they cannot pay on their home and many of the clients are behind on their mortgage payments. So far behind, in fact; that the mortgage company has decided that they’re going to foreclose on their home. Maybe circumstances have improved sufficiently now for the person who has the home to be able to pay their regular mortgage payments but the mortgage company is seeking all of the past due payments. Those may be impossible for somebody to come up with and the mortgage company is unwilling to do anything like put that money in the back end of the loan or something like that so it forces the debtor, the person who owns the home to file a chapter 13 type bankruptcy.

In a chapter 7 bankruptcy, the mortgage company could go ahead and file what’s called a motion for release from the automatic stay order and proceed with the foreclosure but if they file a chapter 13 bankruptcy, then the debtor is able to present a plan that would pay the past due mortgage payments over a period of years, in other words, between 3 and 5 years to catch up on those past due payments and the nice thing is is that the past due payments do not have additional interest tacked on so catching up on the past due mortgage payments is one of the most common reasons for filing a chapter 13 type bankruptcy.

Another common reason is that perhaps the debtor has some significant past due payments for tax debts. Recent tax debts are still priority so tax debts that are owed for recent years, not more than 3, in other words if the tax debt was more than 3 years old, then those debts are no longer priority assuming the debtor has in fact filed the tax return more than 2 years prior to filing of the bankruptcy.

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Katherine: Okay.
Pete Moak:

They can catch up on those past due tax debts as well and not have to, in other words, they can put into the chapter 13 the priority debt that they owe for past due taxes and the nice thing again is that those taxes can be paid off over the next 5 years at no interest. Another reason is that another priority debt is debts that are owed for past due child support or spousal maintenance obligations. If they’re behind on those, then of course they could be in danger of having assessments or garnishment in order to collect those priority debts. In a chapter 13, they can put those priority debts into the chapter 13 and catch up over the next 5 years and be protected from any kind of collection activity for those debts as well as their other debts such as credit cards, et cetera.

Another reason that people have found it necessary or beneficial to file a chapter 13 is that they have a car that’s about to be repossessed or maybe was recently repossessed. If the car was recently repossessed and they file a chapter 13, they can actually get the car returned and they can also use the chapter 13 to catch up on the payments that they have missed so those arrears or past due payments can be put into the chapter 13 and paid the entire debt for the car to be paid off over the next 3 to 5 years.

The reason that I say 3 to 5 years is because if a person’s income is below the median income, then they don’t have to spread it out as much as 5 years, they can make it 3 years but they have the choice of making it 3 or any months between 36 months and 60 months to pay it off inside the chapter 13 plan. Those are just some of the basic reasons why people may choose to file a chapter 13 even though they may qualify to file a chapter 7.

Katherine:

Listen, that’s a lot of good reasons why to file a chapter 13 and a lot to think about. As you were talking, you said that would give a person more time and it feels like I would be able to relax a little bit around it because we panic about our bills. Money may not motivate us, but it definitely puts us in fear when it’s not available to cover even our basic needs. All of that was very informative. What if a person has already filed bankruptcy before? Can they file again and if so, when can they?

Pete Moak:

Yes they can and there are different circumstances that will dictate how long they have to wait between filing a previous bankruptcy. Depending upon the type of bankruptcy will dictate how long they have to wait. Let’s make 1 thing clear. If a person files a bankruptcy, whether it be a chapter 7 or a chapter 13, if that case did not result in a discharge but rather was a case that was dismissed before receiving a discharge, the law considers it as if that bankruptcy was not filed with regard to any timing issues. In other words, these timing limitations or requirements between filing 1 bankruptcy and filing another bankruptcy only apply to those bankruptcies when the earlier bankruptcy actually resulted in a discharge. If somebody filed a chapter 7 bankruptcy for example and they got a discharge, how long do they have to wait before they can file another chapter 7 bankruptcy and the answer to that is 8 years but it’s 8 years from the filing date of the early bankruptcy, not 8 years from the time that the case was discharged.

Many times people are faced with that situation where they have to come in and file another bankruptcy but they can’t qualify for a chapter 7 but they can qualify for a chapter 13. We might file a chapter 13 and then if they want to, once the 8 years has passed from the filing of the earlier chapter 7 bankruptcy, it may be advisable for them to dismiss the chapter 13 bankruptcy and turn around and file a new chapter 7 bankruptcy. That’s one circumstance.

Let’s say a person filed a chapter 7 in the past and now they’re considering filing a chapter 13 bankruptcy. Is there a waiting period? The answer actually is no there is no waiting period in order to file a new chapter 13, but if that person wants to get a discharge, then they have to wait 4 years from the filing of the earlier chapter 7 case. If they filed a chapter 7, got a discharge, now they want to file a chapter 13 and it’s important that they get a discharge in that chapter 13, then they need to wait 4 years but if they do file a chapter 13 less than 4 years, they can still use the chapter 13 to pay debts that they would not be able to discharge in the chapter 7 anyway such as those priority debts and they can be protected from any creditor collection activity during that period of time.

There are many reasons why people will file a chapter 7 and then immediately after receiving their discharge, file a chapter 13. In fact in the bankruptcy industry among attorneys, we call that a chapter 20 because strategically, they may have many unsecured debts that are non-priority that can be discharged in the chapter 7 but they have a huge tax debt that they can’t discharge and they’re receiving threats of garnishment from the taxing authority then they follow it up with a chapter 13 and pay off their tax debts in the chapter 13 over the next 5 years with no interest.

Another circumstance. Let’s say they filed a chapter 13 and now they got a discharge and they want to file a chapter 7, okay. If they filed an earlier chapter 13 and now they want to file a chapter 7, they need to wait 6 years from the day of the filing of the earlier case. That changes somewhat if the person in the chapter 13 was able to pay off at least 70% of the creditors in their earlier chapter 13 bankruptcy. Many times we have people who file a bankruptcy and pay as much as 70% and sometimes even 100% of their debts inside of the chapter 13. If that happens, then they can go ahead and file a chapter 7 after their bankruptcy in the chapter 13 was discharged without having to wait that 6 years.

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Katherine:

Okay.

Pete Moak:

If a person filed an earlier chapter 13 bankruptcy and now they’ve got a discharge and they want to file a new chapter 13, they have to wait 2 years from the original filing date. That would only really apply if a person filed chapter 13 and it was 100% planned meaning that they paid 100% of their debts in a fairly short period of time because bankruptcies are going to be typically 3 years to 5 years long before you get a discharge. That’s different if you’re paying 100% of your debts, you can actually have your bankruptcy case filed. If you received money enough to pay 100% of your debts, you can be out of the bankruptcy as soon as you’re able to pay the 100% of the debts. You don’t have to wait the 3 years to 5 years. If that circumstance exists, somebody files a chapter 13, they come into some money, they’re able to pay off all their debts inside the chapter 13 in less than 2 years, they can turn around 2 years after the original filing date and file a new chapter 13.

Katherine:

If they were able to pay it off earlier, would that allow it to be considered discharged then, yes?

Pete Moak:

Yes, they get the discharge once they pay 100% of the debts and many times, people in a chapter 13 of course will pay very little of their debts. In other words, they have to pay priority debts inside the chapter 13 and they have to pay the secured debts that are to be concluded within 5 years. They have to pay those off during the chapter 13 but they can, if they’re paying 100% of their debts, then they can get out of the chapter 13 as soon as they get those debts completed, in other words, paid 100%, get out of the chapter 13 plan.

Chapter 13’s don’t typically pay 100% of the debts. Sometimes that happens but often times they pay 0% to the unsecured creditors, meaning people like credit cards, bank loans, personal loans, charge accounts of any kind. Anything that’s not connected to collateral is called an unsecured loan. Sometimes we have people who are filing a chapter 13 and don’t pay anything to the unsecured creditors so in many ways, they’re getting the same kind of discharge that they would get if they had filed a chapter 7 but they have an additional benefits of being able to pay debts inside the chapter 13 that could not be discharged by the chapter 7 bankruptcy.

Katherine:

Pete, we’re going to have you come back and talk with us again on next week so I’m going to stick a pin in it right there because you’ve given us, again, a lot of great information but tell people how to get in touch with you outside of This Needs To Be Said.

Pete Moak:

All right. Our offices are located in Chandler, Arizona but we meet with people all over the Maricopa County area for bankruptcy. The Moak Law Firm telephone number is 480-755-8000 extension 1. Extension 1 will always take you to my assistant that will schedule an appointment so we’re happy to hear from you, give you a free 30 minute in office consultation or a telephone consultation if an in office appointment is not possible. Thank you very much, Katherine and we’ll talk to you again.

Katherine:

Awesome. Until next time.

Pete Moak:

All right bye bye.

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