- Chapter 13 is not simply a debt relief plan. It is a way for the debtor to keep his/her property while paying off his/her debt through a payment plan.
- The most basic requirement is that the debtor, even with all of his/her debt, has the economic ability to pay off that debt.
- Non-secured Debts are credit cards, lines of credit, price of items, loans, etc. They can easily be adjusted and later paid off.
- The total amount of an individual’s lines of credit can be paid off in small amounts over the course of 3 to 5 years or paid off as a designated lump sum in a short amount of time.
- Debt that does not involve collateral can be significantly lowered and paid off in a short amount of time.
- Among Secured Debts, there are level 1 and 2 loans. A level 2 Secured Loan can be converted into a Non-secured loan. If that conversion is approved, it is easier to adjust and eventually pay off that debt.
Example) Chapter 13 Application
After purchasing a vehicle for $20,000, there is approximately $13,000 left to pay off on the loan. The vehicle’s market price is $9,000. At this time, the individual can request a compromise so that he/she only pays the market price of $9,000, rather than the leftover loan balance of $13,000.
The individual has a residence, a level 1 loan of $30,000, and a level 2 loan of $10,000
- There is nothing that can be done about the level 1 loan. For the level 2 loan, however, the individual can request than the loan be converted from a loan involving collateral to one not involving collateral.
- If there is no collateral involved, the loan becomes a debt similar to a credit card debt or a line of credit. The individual can then request a decrease in the loan amount. This type of loan becomes the same type of loan as the one that is completely paid off when an individual declares bankruptcy in Chapter 7.
- When applying for Chapter 13, the level 1 loan is adjusted in the most advantageous way with a payment plan. The level 2 loan is significantly decreased, and the debt is liquidated within a short amount of time.
- Chapter 7 takes about 4-6 months, and the fee is approximately $1,000 – $5,000.
- Chapter 13 takes about 1 to 3 years, and it is chosen when the individual has property or assets that he/she wants to keep.
- The fees for Chapter 13 are much greater than the fees for Chapter 7.
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