A chapter 13 bankruptcy is also called a wage earners plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” Chapter 13 bankruptcy involves the reorganization or consolidation of all the filers debts into one amount that is repaid over a period of three to five years. People filing under Chapter 13 do not have to pass a means test, but they do have to prove to the bankruptcy court that they have an income with which to make regular payments on their debt. Some debts like student loans, taxes, child support and alimony cannot be included in the repayment plan and are not subject to discharge. Chapter 13 is very effective at helping filers get a fresh financial start while being able to keep valuable assets like homes and cars without seeking exemptions. There is not the immediate discharge of debt like there is in Chapter 7 bankruptcy, but if the debtor fulfills the obligations of the repayment plan, remaining debt is discharged at the end of the agreed-upon time.
Why File a Chapter 13 Bankruptcy?
Most people choose Chapter 13 bankruptcy filings to protect themselves from foreclosure, repossession or wage garnishment. Filing for bankruptcy protection activates something called an “automatic stay.” That means that while the filing is pending, creditors cannot pursue lawsuits, garnishments, repossessions or foreclosures. In fact, they cannot even contact the debtor while the automatic stay is in place all harassing phone calls and threatening letters must stop once the filing process has begun. Past due amounts on mortgage or car payments can be rolled into the consolidated debt and paid back over the life of the repayment plan, so as long as the debtor remains current. In addition to the protections offered by the automatic stay, Chapter 13 is also a relatively inexpensive way to get a fresh financial start. Yes, filers have to commit to making payments on their debts for a period of time, and the bankruptcy will have a long-lasting impact on their credit rating, but they can also start to rebuild credit not long after filing. Furthermore, the negative impact of a bankruptcy filing is still less significant than that resulting from a foreclosure, repossession or garnishment. When you file a bankruptcy case, an injunction (court order) called the automatic stay goes into effect. The stay prohibits most creditors from taking or continuing actions to collect debts, including preventing or stopping a garnishment and erasing out the underlying debt. Although the automatic stay is a powerful tool, it’s not absolute. The automatic stay might last for only 30 days if you’ve filed for bankruptcy repeatedly or might not be put in place at all.
Why Won’t Bankruptcy Stop All Garnishments?
The automatic stay doesn’t apply to all creditors or all types of debt. For instance, the stay won’t stop a garnishment when:
• you file a Chapter 7 case, and
• the debt is for a domestic support obligation, like past due child support or alimony.
Also, since domestic support obligations aren’t forgiven (discharged) in bankruptcy, the creditor won’t have to suspend the garnishment while the Chapter 7 case is pending, and most bankruptcy courts will not order it. By contrast, a Chapter 13 case will stop all garnishments, including those for domestic support obligations. Be aware, however, that in Chapter 13 bankruptcy, you must fully pay those obligations over a three to five years plan. Therefore, a garnishment will stop while the Chapter 13 bankruptcy is active and you’re making your plan payments.
How to Stop the Garnishment Quickly
After you file your bankruptcy case, it can take the court a week or more to send the official case notification to all your creditors. In the meantime, to make sure that your garnishment stops quickly, you or your attorney should inform both your employer and the garnishment creditor by providing them the bankruptcy case number, filing date, and court location. Once the creditor knows of the bankruptcy, the garnishment must stop even if the employer hasn’t received a notification from the court. Allowing the garnishment would violate the automatic stay. You might be able to get back some garnished wages, but in most cases, trying to do so won’t be worth the cost. It’s usually better to avoid a loss by filing for bankruptcy fast. The garnishment will have had to have occurred during the 90 days before the bankruptcy filing date. It will need to exceed a particular amount (this amount changes periodically), and you’ll need to be able to protect that amount with an exemption (a law that allows you to keep certain property in bankruptcy). The issue for most, however, is that most states don’t have an exemption that protects cash or it’s minimal. Also, to recover this money, you’ll have to file a lawsuit in the bankruptcy court against your creditor. Whether that makes financial sense will depend on how much you stand to get back and how much your attorney will charge to file the lawsuit.
What Should I Do After the Bankruptcy Ends?
After your bankruptcy case, your creditors cannot resume garnishments on discharged debts, such as credit card balances, personal loans, and medical bills. But creditors can resume garnishments on non-dischargeable debts because you’ll remain responsible for paying them. If the court dismisses your case without a discharge, you lose the benefit of the automatic stay, and your creditors can resume their garnishments (and other collection actions) for all debt types. If your employer is deducting funds from your check due to a wage garnishment and you can’t pay your monthly bills, filing a bankruptcy case will offer you some relief. How long that relief lasts will depend on the type of bankruptcy you file and the type of debt the creditor is collecting. Under most circumstances, when you file a bankruptcy case, an injunction (a type of order) called the automatic stay goes into effect. The stay prohibits creditors from taking collection action against you or your property without permission of the bankruptcy court. All garnishments are subject to the automatic stay, and the employer should stop removing the garnishment amount from your paycheck as soon as possible after receiving notice that you’ve filed bankruptcy (in most cases, you or your attorney will notify the employer immediately after filing). The stay usually remains in effect until you receive a discharge (forgiveness of your debts) or your case gets dismissed (closed); however, your creditor can file a motion and ask for permission to resume collection activities. The bankruptcy will probably stop the garnishment permanently for dischargeable debt, such as credit cards, personal loans, and medical bills. Because garnishments for these debts are available only as a collection tool to creditors who’ve gotten court judgments, it might be necessary for your bankruptcy attorney to take additional action to eliminate (avoid) an associated lien to make sure that the garnishment won’t come back to haunt you.
Debts You Can Wipe Out in Chapter 13 Bankruptcy
Many debtors file for Chapter 13 bankruptcy to reorganize their debts and catch up on their missed mortgage or car loan payments through an affordable repayment plan. If you successfully complete your repayment plan, you will receive a bankruptcy discharge that wipes out your personal liability for most of your debts. Read on to learn more about the types of debts you can eliminate in Chapter 13 bankruptcy.
Non-priority General Unsecured Debts
For many bankruptcy debtors, most of their obligations fall into the non-priority unsecured debt category. In general, non-priority unsecured debts are the easiest obligations to eliminate in bankruptcy because they receive no special treatment under the law. If a non-priority unsecured creditor wants to challenge your discharge, it must typically prove that you committed fraud when you obtained the debt. The following are some of the most common non-priority general unsecured debts you can wipe out in Chapter 13 bankruptcy:
• credit card obligations
• medical debt
• personal loans
• older income taxes that qualify as non-priority debts
• most types of lawsuit judgments (be aware that a Chapter 13 discharge will not eliminate any debts arising out of willfully and maliciously injuring another person), and
• outstanding utility bills.
What Are Some Liens You Cram Down or Strip in Chapter 13 Bankruptcy?
In bankruptcy, certain obligations are referred to as secured debts because the creditor has a lien on a piece of property you pledged as collateral. Simply receiving a bankruptcy discharge doesn’t automatically eliminate a creditor’s lien from your property. Even if you receive a discharge, secured creditors retain their right to foreclose on or repossess your property if you default on the obligation. But if you can satisfy the necessary requirements, Chapter 13 bankruptcy may allow you to modify or remove certain liens from your property through:
• a cram down, or
• Lien stripping.
Chapter 13 Bankruptcy Cram down
A Chapter 13 bankruptcy cramdown allows you to reduce the principal balance (or interest rate) you owe on a secured loan. But you must satisfy certain requirements before you can cram down a secured debt. If you qualify, the loan will be divided into secured and unsecured portions. You will pay the secured portion in full through your Chapter 13 plan. The unsecured portion will be treated as a non-priority unsecured debt and any unpaid amount will be discharged at the end of your bankruptcy.
What Is Lien Stripping In Utah?
If your first mortgage (or other senior lien) balance exceeds the value of your home, you may be able to remove a junior lien (such as a second mortgage) from your home through a process called lien stripping. When you strip a junior lien, it’s treated as a non-priority unsecured debt in Chapter 13 bankruptcy and wiped out when you receive your discharge.
Debts You Can Eliminate in Chapter 13 Bankruptcy But Not in Chapter 7
In general, you can wipe out more types of debt in Chapter 13 bankruptcy than in a Chapter 7. Some of the most common debts you can discharge in Chapter 13 bankruptcy but not in Chapter 7 include:
• debts for willfully and maliciously damaging someone’s property
• debts you incurred to pay non-dischargeable tax obligations
• debts incurred as a result of a divorce decree, separation or property settlement agreement, or a similar proceeding that are not characterized as support payments (support obligations such as alimony or child support are not dischargeable in Chapter 7 or Chapter 13 bankruptcy)
• debts included in a prior bankruptcy in which the court denied your discharge
• 401(k) or other retirement account loans
• HOA fees incurred after filing for bankruptcy, and
• certain government fines and penalties (not including criminal fines).
By filing for Chapter 13 bankruptcy, you will be able to retain your assets while you pay off as much of your debt as you can afford.
Chapter 13 bankruptcy may be the best debt relief option for you. By filing, you may be able to:
• Eliminate some credit card debt while restructuring it for lower monthly payments
• Stop foreclosure
• Keep your house and car
• Include tax debt and student loans in the restructured plan
• Strip off second mortgages
• Negotiate lower payments for certain loans
What Is A Chapter 13 Repayment Plan?
Chapter 13 bankruptcy payment plans generally last between three and five years. During that time, you will make payments to a trustee who will pay your creditors based on what you can afford to pay. When the previously determined length of the plan is completed, your remaining debt will be discharged.
The amount of the payments you make to your creditors is calculated in part by use of the federal means test. The means test will be used to determine your disposable income at the end of each month. This is the amount of money you have left over, after paying your bills and taking care of your daily expenses, as based on standards set up by the bankruptcy court. This disposable income will often constitute your payments to creditors.
Why File For Chapter 13 Bankruptcy?
As soon as you file for Chapter 13 bankruptcy, you will stop wage garnishment and harassing phone calls from creditors. As previously mentioned, you can retain all your assets, including your house and your car, in most cases. By entering a plan to repay your creditors, you will begin to rebuild your credit as well. When the process is over your remaining dischargeable debt will be completely discharged.
What Is Credit Counseling?
If you are going to pursue personal bankruptcy, you must undergo credit counseling. This federally mandated requirement will help you understand what you can do to rebuild your credit, avoid future debt and plan for the future. We can help you discharge your debt and move toward a debt-free future.
THE AFTERMATH OF BANKRUPTCY AND ITS EFFECT ON WAGE GARNISHMENT
Once a bankruptcy case is complete, the automatic stay will end simultaneously. In bankruptcy cases that result in the discharge of debt, creditors may not resume wage garnishment. Dischargeable debts include credit card balances, personal loans, and medical bills. If the court dismisses a bankruptcy case before or without a discharge, however, creditors can continue to garnish wages.
Free Initial Consultation with Lawyer
It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506