Back To Basics Education Series: What It Means to File Chapter 13 Bankruptcy in Massachusetts

by Jack Morrison on September 23, 2011

This week we pick back up with our special “Back to Basics” education series in honor of back to school. As a Worcester bankruptcy lawyer, I think it’s important we discuss four basic topics that are critical to understanding if bankruptcy is right for you:

  1. Chapter 7
  2. Chapter 13
  3. Reaffirmation
  4. Life After Bankruptcy

Now let’s delve into our next topic: understanding Chapter 13 bankruptcy in Massachusetts. 

Massachusetts Chapter 13 Bankruptcy
Chapter 13—in a nutshell—means that you are committing to repaying individuals or companies some or all of the money you borrowed from them. Your proposal, the Chapter 13 plan, pays your creditors over a 3 or 5 year term.  The payment amount is a specified amount, depending upon certain criteria.    At the end of the term, any remaining unpaid debt is discharged…meaning you have no legal liability to pay the debt.

Why is a Chapter 13 Bankruptcy helpful for you? Let’s use an example:

Suppose you owe $45,000 in credit card debt. The credit cards are charging an AVERAGE interest rate of 15%. The interest only payment on that amount is $562.50 per month.

Even if you pay $1,000 per month, only $437.50 goes towards the principal, at that rate, it will take you over 5 years to repay the debt. Over the course of the 5+ years, you will have paid $66,548 ($45,000 principal and $21,548 interest) to the credit card company.

Under a Chapter 13, if certain criteria were established where your disposable income was calculated to be $500 per month and the term is 3 years,  you would pay $18,000, in total, to the credit card company.

    • No interest accrues during the Chapter 13 plan period
    • At the end of the Chapter 13 plan term, any remaining debt is discharged.

One of the most common reasons for filing a Chapter 13 Bankruptcy is to keep your home. If you find yourself behind on your mortgage payments and don’t have the cash to get caught up, filing a Chapter 13 Bankruptcy can help you keep your home. You have to show you have the ability to make monthly payments AND have the ability to repay the missing payments over the 3 or 5 year term. The bank can’t refuse or deny your payments under the Chapter 13 plan so long as they are paid each month.

Another reason you may want to file Chapter 13 is if you owe taxes to the IRS or State that arise within 3 years or less. Those taxes are not dischargeable – meaning you have to pay them. You can keep the IRS and State Taxing Authority off your back over the 3- or 5-year timeframe if you include payments into your Chapter 13 plan. A key advantage is the interest and penalties do not accrue during the Chapter 13 plan.

The payment plan that you propose in Chapter 13 is based upon a set of standards. This means looking at what disposable income you have remaining after calculating income and expenses.

As a Worcester bankruptcy attorney, it’s my job to help you figure this out. Don’t worry if you can’t calculate this on your own.

For more information on a Chapter 13 Massachusetts bankruptcy, read this article on my website.

Next week, tune in as we discuss the basics of Reaffirmation.

Do you have questions about your financial situation? Then you might want to sit down with a knowledgeable Worcester bankruptcy attorney. Call my office, the Law Office of Jack Morrison, today at 508.852.7800 or reach out via our contact form. Thank you.

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