Chapter 13 bankruptcy is also known as personal reorganization and involves repaying a portion of your debts over the course of a three to five year plan. Most people who file Chapter 13 do so because their income is too high to file Chapter 7, which requires you to be below the median income for your household size. However, there can be other reasons people file Chapter 13. One of those reasons is that the person who is considering filing has more equity in their home than can be protected under the homestead exemption.
It’s not unusual for people considering bankruptcy to panic when they discover that they’ll have to file Chapter 13 to get the protection the bankruptcy court provides. They worry about their ability to commit to a three to five year payment plan. They also worry about what happens to them if there is a change in their financial circumstances.
Fortunately, the Chapter 13 bankruptcy process offers a fair amount of flexibility. If your income falls during your repayment plan, we can reduce your repayment amount and potentially convert your case to a Chapter 7 if your income goes below the median income amount.
If someone files Chapter 13 because the equity in their home exceeds homestead exemption (which is currently $75,000) and wants to sell their home during the Chapter 13 process, they will have to turn over any proceeds from the home that exceeds the homestead exemption. So, for example, if someone nets $100,000 from the sale of their home, $25,000 of the proceeds are non-exempt (or unprotected). Consequently, they will have to turn that $25,000 over to the Chapter 13 bankruptcy trustee to distribute to their creditors. If it’s enough to pay off the claims that have been filed in their case, they can receive their discharge early.
Of course, it may not make sense to sell your home during your Chapter 13 bankruptcy. It can depend on how far into your plan you are and what your financial goals are. The Chapter 13 process has lots of moving parts and there is much to consider before going down that path. An experienced bankruptcy attorney can help you navigate the process and avoid any missteps or pitfalls.
If you have questions about the Chapter 13 bankruptcy process, call us. We offer no obligation consultations to answer your questions and talk about your concerns.