There are significant differences between Chapter 7 and 13. Chapter 13 is a “payment plan” bankruptcy. It requires a debtor to make monthly payments to the bankruptcy trustee for 3 – 5 years. As an Arizona bankruptcy lawyer, Arizona real estate lawyer and Arizona foreclosure lawyer, I frequently advise a debtor to file Chapter 13 because the debtor not only receives a discharge after making all plan payments, but the plan payments must be first used to pay off mortgage arrearages to avoid a foreclosure.
But there is a catch. You also have to pay your normal mortgage payment on top of your Chapter 13 monthly payment if you want to keep the house. If you are unable to afford your normal monthly mortgage payment, then a Chapter 13 could end up being a big waste of time and money.
But how much do I have to pay to the trustee?
That is the two million dollar question. As a basic rule of thumb, the monthly Chapter 13 payment is your monthly take-home pay (i.e., your gross monthly income less your tax deductions, insurance deductions, etc.) MINUS your reasonable household expenses. The million dollar question is “what household expenses are considered reasonable?” Such computation can be very difficult, depending on a debtor’s financial circumstances.
Your payment also depends on your other debts and assets.
Assume you are behind on your mortgage and car loan. You need to pay enough into the Chapter 13 pot to cover your mortgage arrearages and your entire car loan if you want to keep them. You also have to pay enough to cover your unpaid attorney fees and the value of your non-exempt assets.
For example, if you have $8,000 worth of non-exempt assets and you owe $15,000 in mortgage arrearages, $5,000 for your car loan and $2,000 for bankruptcy attorney fees, you must pay a total of at least $30,000 to the Chapter 13 trustee ($8,000 + $15,000 + $5,000 + $2,000) during the plan term. If you are in a 5-year plan, your payment will be at least $500/month ($30,000 divided by 60 months). That would allow you to come current on your mortgage, pay off your car loan, pay the balance of your attorney fees, and keep all of your non-exempt property (that you would otherwise have to surrender if you filed Chapter 7). Your payment may even be more if you have above-average income. On top of this payment, you will need to pay your regular household expenses, such as your normal monthly mortgage payment, your electric bill, your medical expenses and your auto insurance. It can get expensive!
I can use Chapter 13 to get a loan mod, right?
Wrong. Chapter 13 cannot force a mortgage lender to approve a loan modification for your primary residence. A mortgage lender may voluntarily agree to a loan mod, but the Court cannot compel the lender to do so.