Chapter 13 Bankruptcy in New Mexico
The most common types of bankruptcy filing are commonly referred to as either Chapter 7 or Chapter 13. Chapter 7 is far more common, though there exist many reasons to choose one over the other, depending upon your specific circumstances. There are many reasons why an individual would decide to pursue a Chapter 13 bankruptcy over a Chapter 7 bankruptcy; in some cases the prospective bankruptcy filer may not have the option to file a Chapter 7 due to income guidelines or other prohibitions. Briefly, Chapter 13 is the repayment of debts using the filing party’s income over a period of time.
Reasons to choose a Chapter 13 Bankruptcy
One reason to choose a Chapter 13 bankruptcy is because the individual does not qualify for a Chapter 7; this is probably because the individual has primarily consumer debt, and cannot pass what is commonly known as the “Means Test” due to a high income or lack of allowable expenses. Another reason to choose a Chapter 13 is to “cure” the arrears on a mortgage or car loan. A Chapter 13 is also useful because it allows for repayment of debts that may not be dischargeable through a Chapter 7; such debts typically include priority tax debts. Yet another reason to choose a Chapter 13 is to cramdown car loans or strip unsecured liens. If an individual has property that may be liquidated in a Chapter 7 (because they are non-exempt; see New Mexico Bankruptcy Exemptions here) a Chapter 13 may be a good alternative, because it allows the individual to keep their property. One more reason an individual may choose a Chapter 13 is if that individual has a co-signer on a particular debt; a Chapter 7 may get the individual a discharge with respect to that particular debt, but the co-signer will still be liable.
Chapter 13 Eligibility
Not all filers are eligible to file a Chapter 13 bankruptcy due to certain debt limits. There is a secured debt limit of $1,081,400 and an unsecured debt limit of $360,475; for more information see our article on the difference between secured and unsecured debt. If an individual is over the debt limit their alternative is to file either Chapter 7 or Chapter 11. Individuals that do not qualify for Chapter 13 but want to keep their property will have to consider filing a very expensive individual Chapter 11 (the costs can range from low to mid-five-figures).
New Mexico Chapter 13 Overview
The filing fee for a Chapter 13 is $274 and requires that the individual wishing to file complete a credit counseling course (this course is required when filing a Chapter 7 as well). A bankruptcy attorney is recommended to help prepare the individual’s petition, schedules, and repayment plan. The attorney assisting the individual will help determine the length of the repayment plan (depending on the individual’s income), and will draft the repayment plan that spells out how much reimbursement different categories of creditors will receive.
Chapter 13 Plan
When drafting the plan, the attorney assisting you will make sure that the plan was proposed in good faith and does not fail either the “Best Interest of Creditors Test” (11 USC § 1325)or the “Best Efforts Test”. Briefly the “Best Interest of Creditors Test” requires that unsecured creditors get no less than they would have received had the debtor filed a Chapter 7. The “Best Efforts Test” requires the debtor to apply at least their disposable income, as determined by the means test, monthly for the applicable commitment period (36 months for debtors below the median, or 60 months for debtors above the median). Also, the plan must provide for full repayment of priority claims; payments to a home lender can continue beyond the commitment period however, as long as the arrearage is made up during the plan. Note that unsecured creditors may end up getting pennies on the dollar, as they are last in line to receive anything from the Bankruptcy estate. A plan can technically be shorter than the applicable repayment period, but this requires paying unsecured debts in full over a shorter timeframe.
After the Petition is filed
Like a Chapter 7 bankruptcy, when a Chapter 13 is filed, the automatic stay applies to creditor collection activities. A nice aspect about Chapter 13 bankruptcy, is that the automatic stay (11 U.S.C. § 362) also applies to creditors who attempt to collect a consumer debt from co-debtors. 11 U.S.C. § 1301(a).
30 days after the petition is filed, the individual will be required to deposit the first payment according to the proposed repayment plan. This payment and all subsequent payments will get distributed to your creditors once the plan is confirmed; the payment has to continue even when creditors object to confirmation of your plan. The trustee is the party that will distribute the funds to various creditors according to the plan and gets paid a percentage of what is paid under the plan. Additionally, the debtor will have to attend a meeting of creditors conducted by the Chapter 13 trustee; at this meeting the trustee will ask the debtor about their financial information and schedules that were filed with their bankruptcy petition.
After the meeting of creditors there will be a confirmation hearing to determine if the plan will work, if it will not, the judge will send you back to the drawing board to modify the plan. Confirmation of the plan is important because it binds the debtor to adhering to the plan and sticking to a budget. Failing to make payments under a plan can cause the bankruptcy to be dismissed or converted to a Chapter 7. If circumstances change through no fault of the debtor, thus making the payments impossible under the 13 repayment plan, a hardship discharge could and should be pursued. Speak with your local new mexico bankruptcy lawyers today about any further questions you might have, or simply to get started if you feel you are ready.