Automatic Stay
The automatic stay in bankruptcy will go into effect immediately upon your filing into Chapter 13 Bankruptcy.
This stops collection actions by any creditor against you (garnishments, harassing phone calls, lawsuits, seizures of money in your bank accounts, foreclosure lawsuits, etc.)
This “stay” will remain in effect throughout your Bankruptcy case until and unless a creditor files a motion to lift the stay to proceed with the repossession of a car or other collateral or to proceed with a foreclosure action against you.
This will only be done if you fail to make the required monthly payments.
If you continue to make your regular required payments, the creditor will not file a motion to lift the stay.
No More Minimum Payments
The moment you file into Chapter 13 bankruptcy, you will no longer have to make any payments on your credit cards as they will all be included in your bankruptcy and be paid through the chapter 13 trustee.
Better to File Earlier Than Later
It’s always better to file the chapter 13 bankruptcy as soon as you can because the moment you file into bankruptcy, all interest, fees, etc. will stop on the creditor’s claim and it will be frozen as to the amount they are owed on the date you file.
Once you file, each of your creditors will have the right to file what is called a proof of claim to state how much they were owed on the date you file and therefore entitled to be paid through your bankruptcy.
They are not allowed to add interest, late charges, fees, etc. that accrue after you file into bankruptcy.
If you wait to file, then interest and fees, etc. will continue to accrue, thereby increasing the amount of the claim, and consequently, the monthly payments in the bankruptcy may be higher should the trustee demand a higher payout, which can happen.
Some trustees demand a 100% payout over the 5 years of the plan if the Means Test shows that you can afford it, or if after deducting your ordinary living expenses from your monthly income, it shows that you can make it by squeezing a little. Therefore, the less the claim, the less you will have to pay.
You May Pay Less than What You Owe
If your income and expenses show that you do not have sufficient net income to contribute to making a 100% distribution to your creditors during the 5 years, then you may be able to pay as little as 10% or less on all your debt.
When you complete making all 60 payments under the plan, the rest of the debt will be discharged meaning that these creditors will NEVER be able to pursue you for the rest.
No Taxes on Discharged Debt
Unlike settling a debt outside of bankruptcy where you have to pay income taxes on the amount of the debt that the creditor does not collect from you, in bankruptcy, there is no such tax. As long as you complete all payments under your plan and obtain your discharge, this cancellation of debt in bankruptcy is not taxable.
Creditors Must Accept Your Plan
Your creditors are not allowed to “say no” and reject the monthly payment that you will be making during your bankruptcy case under the plan.
Your monthly payment is determined after deducting your ordinary living expenses from your monthly household income. The net amount will have to be contributed to the plan and will be your monthly payment.
It is up to the chapter 13 trustee to determine whether the monthly payment amount you propose to pay under the plan is acceptable and even then he or she is limited.
If it comes down to it, the Bankruptcy Judge will make the final decision as to whether your proposed monthly payment amount is acceptable or whether it needs to be increased.
If You Lose Your Job During Chapter 13
If something happens during the chapter 13 bankruptcy such as a loss of job, which leaves you unable to afford to make your monthly payment, then you may be able to reduce your monthly payments over the remaining life of the plan or you can obtain what is called a hardship discharge. You can also convert to chapter 7 if your income was reduced substantially and still wipe out all of your debt.
Chapter 13 Looks Better on Your Credit Report
Of course, when you apply for credit, the chapter 13 bankruptcy will show up. It is always good when lenders see that you have paid some or all your debt even in bankruptcy.
A report by the Federal Reserve Bank of New York found that people who filed into bankruptcy to escape the financial “traps” they found themselves in, have access to more new credit within 9 months to 1 year after the bankruptcy than those who limped along in a poor financial state, but did not file for bankruptcy on the mistaken belief that this would “protect” their credit rating.
No More Worrying
No more having to be scared of picking up the phone, or that lawsuits will be filed against you, or judgments entered against you.
Judgments are valid for 20 years in the State of New York and if a judgment is entered against you before the bankruptcy, the creditor will be able to file the judgment as a lien against your house, garnish your wages, and/or seize your bank accounts.
No more contemplating withdrawing from your retirement funds to pay your debts, which are otherwise protected in the bankruptcy, or refinancing your house, to tap into the equity to pay.
No more guilty feelings or feelings of being trapped.
You will feel emotionally better about yourself, and you will no longer have to worry day in and day out about what will happen to you and your loved ones tomorrow or 5 years from now.