Chapter 13 Bankruptcy in New York

Chapter 13 is a reorganization bankruptcy that lets you repay creditors on terms set by federal law — usually three to five years — and obtain a discharge of any remaining unsecured balance at the end. It is the right tool when Chapter 7 is not available, when you need to save a home from foreclosure, or when you have property you want to keep that a Chapter 7 trustee would otherwise sell.

When Chapter 13 Is the Right Chapter

We typically recommend Chapter 13 in four scenarios:

• You are behind on a mortgage and want to keep your home. Chapter 13 lets you cure the entire arrears through the plan, on a timeline of up to five years, while maintaining the regular monthly payment.
• You earn too much for Chapter 7. Filers who fail the means test on the income side cannot get a Chapter 7 discharge, but they can almost always file Chapter 13.
• You have non-exempt assets you want to protect. In Chapter 13 you keep everything — the trade-off is that unsecured creditors must receive at least what they would have received in a hypothetical Chapter 7.
• You have priority debts that cannot be discharged in Chapter 7. Recent taxes, child support arrears, and similar priority claims can be paid over the life of a Chapter 13 plan rather than collected all at once.

What a Chapter 13 Plan Does

A Chapter 13 plan is a written document, signed by the debtor and filed with the court, that proposes how creditors will be paid over a three-to-five-year period. The plan is funded by the debtor's monthly disposable income. The standing trustee distributes that monthly payment among creditors in priority order:

1. Trustee's commission and administrative claims.
2. Secured creditors. Mortgage arrears, car payments, and (in some cases) cramdown of secured claims to collateral value.
3. Priority unsecured creditors. Recent income taxes, domestic support arrears.
4. General unsecured creditors. Credit cards, medical bills, deficiency claims, judgments. These are paid pro rata from whatever remains. In many cases the unsecured pool receives a small percentage, sometimes near zero.

Saving a Home From Foreclosure

The single most common use of Chapter 13 in our office is stopping a foreclosure sale and curing the arrears. The mechanics:

• The petition is filed and the automatic stay attaches, halting the sale.
• The mortgage arrears (missed payments, attorney's fees, escrow shortfall) are folded into the Chapter 13 plan and paid over the life of the plan.
• You resume regular monthly mortgage payments going forward.
• At the end of the plan, the loan is current and the case discharges any remaining unsecured debt.

Lien-Stripping Wholly Unsecured Junior Mortgages

If your home is worth less than what you owe on the first mortgage, a wholly unsecured second mortgage or HELOC can be stripped off the property through Chapter 13. The junior lender is reclassified as an unsecured creditor, paid pro rata in the plan, and the lien is discharged at the end. This is one of the most powerful tools Chapter 13 offers New York homeowners.

Eligibility Limits

Chapter 13 is available only to individuals (and individuals with their spouses). Corporations and LLCs cannot file Chapter 13. There are also debt limits — as of the current statutory amounts, total non-contingent, liquidated unsecured debt and secured debt must each fall below the Chapter 13 ceilings. Filers whose debts exceed those ceilings file Chapter 11 instead.

You also need regular income sufficient to fund the plan. "Regular income" can include self-employment income, Social Security, pension payments, alimony, and similar streams — not just W-2 wages.

Confirmation

A Chapter 13 plan does not bind creditors until the bankruptcy judge confirms it. The plan must satisfy:

• The best-interests-of-creditors test. Unsecured creditors must receive at least what they would have received in Chapter 7.
• The disposable-income test. All projected disposable income during the plan period must be committed to plan payments.
• Feasibility. Income must reliably support the proposed payments.
• Good faith. The plan and the petition must be filed in good faith.

Trustees and creditors regularly object to plans for failing one or more of these tests. We have confirmed plans in dozens of contested situations, including objections to secured-claim treatment, valuation disputes, and best-interests challenges.

Discharge

At the end of a successfully completed Chapter 13 plan, the court issues a discharge of all remaining dischargeable unsecured debt. The Chapter 13 discharge is slightly broader than the Chapter 7 discharge — certain debts dischargeable in Chapter 13 are not dischargeable in Chapter 7 (sometimes called "the Chapter 13 super-discharge"), though the scope has narrowed in recent years.

To discuss whether Chapter 13 fits your situation, call 212-233-1233. The initial consultation is free.