When a family is struggling with debt, Chapter 13 bankruptcy can often be a good solution that will allow them to consolidate certain debts into a single payment plan, discharge debts after the payment plan is completed, and maintain ownership of their home and other property. However, if a married couple decides to get a divorce before they have completed their Chapter 13 repayment plan, they will need to determine how their bankruptcy case will be affected and what steps they can take to address their outstanding debts.

Options for Chapter 13 Bankruptcy During a Divorce

Couples who have filed for Chapter 13 bankruptcy and begun making payments on a repayment plan have multiple options if they choose to get divorced. These include:

Anyone who struggles with significant debts will want to understand the options that may allow them to reduce or eliminate what they owe. Chapter 7 bankruptcy is often the ideal option for those who do not own significant assets since it can be completed quickly and will allow a person’s unsecured debts (such as credit card balances) to be discharged. However, those who have secured debts (such as a mortgage or car loan) or who own significant assets may need to use Chapter 13 bankruptcy. In these cases, debtors may have options for reducing the debts they owe through methods known as “cramdowns” and “lien stripping.”

Addressing Secured and Unsecured Debts in a Chapter 13 Bankruptcy

In a Chapter 13 bankruptcy, a person’s unsecured debts will be consolidated into a repayment plan. The debtor will make payments on this plan over a period of three to five years, and once all payments in the plan have been made, the remaining unsecured debts included in the plan will be discharged. Typically, a person will need to make ongoing payments on secured debts along with the payments made during their Chapter 13 repayment plan. 

Chapter 13 bankruptcy usually will not be used to discharge secured debts since non-payment of these debts would result in the creditor repossessing the property used as collateral for these debts. However, a debtor may have options for reducing the amount of their secured debts.

The recent CARES Act deadline for excluding pandemic relief payments from Chapter 13 “current monthly income” was extended to March 27, 2022. 

Way back in March 2020, the CARES Act made some helpful temporary changes to consumer bankruptcy law. (See our blog post in April 2020 about this.) Some of these changes would have expired, but in the meantime, Congress passed two other laws which extended the changes. These are still temporary, so it’s important to know the new deadlines. Last week we focused on one change dealing with Chapter 7’s means test. Today we focus on a similar change and new deadline about Chapter 13’s crucial “current monthly income” calculation. 

The Crucial Role of Your “Current Monthly Income” in Your Chapter 13 Payment Plan

The Chapter 13 “adjustment of debts” consumer bankruptcy option provides many advantages over Chapter 7 “straight bankruptcy” for many people. Chapter 13 tends to be better for those with tax and child/spousal support debts, vehicle and home mortgage loans, and more than usual or unusual assets. It involves paying into a monthly Chapter 13 plan for the benefit of your creditors. Usually, that plan allows you to prioritize paying your more important creditors over the rest of them. 

Chapter 13 bankruptcy enables you to use the pandemic’s mortgage payment forbearance process and sell your home if and when you are ready to do so.

Last week we showed how Chapter 7 helps you take advantage of the pandemic foreclosure moratorium when selling your home. Today we show how it works even better with the more powerful Chapter 13 “adjustment of debts.”

Being unable to meet your monthly debt obligations can be a serious source of stress. Many people in this situation turn to bankruptcy as a possible solution. For some people who have a steady income, a Chapter 13 repayment plan may be the best option. Often referred to as the “wage earner’s plan,” this type of bankruptcy allows individuals to repay all or a portion of their debts over a period of three or five years. Each month, a single payment is made to the bankruptcy trustee, who then distributes the appropriate amount to each creditor.

Chapter 13 bankruptcies are popular with individuals who have secured debt attached to certain items that they want to keep, like a house or a car. This is because a Chapter 13 bankruptcy allows individuals to distribute any past due payments into the repayment plan so they can get caught up. While the draw of a Chapter 13 bankruptcy is present, most peoples’ first question is, “How much will my payments be?”

Factors Affecting Your Payment