Filing for bankruptcy is a big decision, but it can be necessary in order to get back on your feet financially, especially if you have experienced difficulties that have made it impossible to make ongoing payments toward large debts. However, if you are a homeowner, you will likely be looking for solutions that will allow you to avoid foreclosure and keep your home. In many cases, Chapter 13 bankruptcy is the best option, but it is important to understand how mortgage loans will be handled in these types of bankruptcy cases.

What Is a Chapter 13 Bankruptcy?  

A Chapter 13 bankruptcy is also known as “reorganization” because it allows you to reorganize your debts into manageable payments over three to five years. During this period, you will make payments to a court-appointed trustee, who will distribute the payments to different creditors. If all payments are made on time and according to the plan, the remaining unsecured debts may be discharged at the end of the repayment period. Through this method, you can eliminate debts like credit cards and medical bills. Unlike a Chapter 7 bankruptcy, Chapter 13 will not require you to turn over any property that you own, and this may allow you to protect the equity in your home.

During your bankruptcy repayment plan, you will also be required to make ongoing mortgage payments. The amount you pay each month toward your repayment plan will be based on your disposable income, or whatever is left over after paying your regular monthly expenses, including food, clothing, utilities, insurance, transportation costs, and auto loan and/or mortgage loan payments. This will ensure that you will be able to cover all of your family's needs while using the leftover income to pay off some of your debts, and once you have completed your repayment plan and eliminated various unsecured debts, you will be more likely to maintain financial stability in the future.

People with significant debts may qualify for multiple types of debt relief, and in many cases, bankruptcy is the best option. Those who plan to file for bankruptcy will often choose to file under Chapter 7, since this will allow most types of debts to be discharged/eliminated within just a few months. However, debtors will need to meet certain requirements to qualify for debt relief under Chapter 7. One of the most important criteria is the means test, which measures a person’s financial situation to determine whether they have the ability to repay some of their debts.

What Is the Means Test? 

The means test is used to determine if you have enough disposable income left over after paying essential expenses related to housing, food, transportation, etc. By looking at your income and expenses, the means test measures whether you have enough money in your monthly budget to repay at least some of what is owed to your creditors. If not, then you may be eligible for a fresh start through Chapter 7 bankruptcy. Otherwise, you may need to pursue a Chapter 13 bankruptcy or other debt relief options.

How Does the Means Test Work? 

The means test starts with calculating your current monthly income (CMI). To do this, the total income you earned during the six-month period before filing for bankruptcy will be added together, excluding Social Security payments and public benefits. That number is then divided by six to determine your CMI. If your CMI is less than the median income in your state, then you will automatically pass the means test. In North Carolina, the median annual income for bankruptcy cases filed after November 1, 2022 is $55,621 for a single person. The median income increases based on household size: $69,303 for a married couple or a household of two people, $80,895 for a household of three people, and higher amounts for households with more people.

Debts can be difficult to deal with in any situation, but in some cases, the failure to pay what is owed could result in the repossession of a vehicle or other property. While bankruptcy may be an option if you are struggling with debt, determining how a bankruptcy filing will affect a repossession is not always easy. Will filing for bankruptcy stop a repossession? Will it allow you to recover property that has already been repossessed? By understanding the procedures followed during bankruptcy, you can make sure you follow the correct steps to protect yourself and receive relief from your debts. 

Preventing Repossession Through the Automatic Stay

When you begin the bankruptcy process, an automatic stay will go into effect as soon as your bankruptcy petition is filed. The automatic stay is a court order that blocks creditors from taking any collection actions against you, including repossessing your property. By filing for bankruptcy as soon as you learn that a creditor plans to repossess a vehicle or other property, you can prevent the repossession and determine how to address your outstanding debts. As long as the automatic stay is in place, creditors will be unable to repossess your property. However, a creditor may ask for the automatic stay to be lifted if they believe that they may suffer losses due to the destruction of property, so it is important to move forward with the bankruptcy process and make sure you address your debts correctly with the help of an attorney.

Recovering Property Following a Repossession

If your vehicle has already been repossessed, you may be able to get it back after you file for bankruptcy. However, you will need to act quickly to do so, since once a creditor sells property that has been repossessed, it can no longer be recovered. After filing for bankruptcy, the equity you own in your vehicle will be part of the bankruptcy estate, and a creditor may be required to return it to you during the bankruptcy process as you determine how to address your debts, the assets you own, and other issues.

Though no one wants to have to file for bankruptcy, it may sometimes be the best option available. Many Americans face situations where debts become overwhelming, and paying back what is owed while also being able to meet a family's ongoing needs may become impossible. Bankruptcy can be the ideal way to receive relief in these situations, and it can often help resolve debt-related issues before they get worse and lead to consequences such as repossession or home foreclosure. By understanding some of the most common reasons people pursue bankruptcy, you can realize that you are not alone and that you have options.

Financial Issues That Often Lead to Bankruptcy

The need for debt relief can arise in a variety of situations, including:

• Job Loss or Reduction in Income - One of the most common reasons people file for bankruptcy is due to a loss of income. This can come in the form of a job loss or a significant reduction in salary. If you lose your job, it can be difficult to make ends meet, especially if you have a family to support. If you have exhausted all other options, such as borrowing money from friends or family or selling possessions, filing for bankruptcy may be your best option. 

  ...

Along with the ability to eliminate certain types of debts, one of the key benefits of bankruptcy is the automatic stay. This is an order that is put in place by a bankruptcy court immediately after a debtor files for bankruptcy, and it will force creditors to cease all collection actions during the case. This means that creditors cannot call, email, send letters, or otherwise communicate with a debtor. They cannot proceed with a legal judgment against a debtor, garnish their wages, freeze or seize their bank accounts, repossess a vehicle or other property, or take any other actions in an attempt to collect a debt. Any foreclosure proceedings that have been initiated must be put to a halt.

The automatic stay can provide a debtor with protections and give them some "breathing room" as they address their debts during the bankruptcy process. However, there are some situations where the automatic stay can be lifted. By understanding when a creditor may request an exception to the automatic stay, a debtor can make sure they are prepared to address these issues as they proceed with bankruptcy.

The Purpose of the Automatic Stay

The main purpose of the automatic stay is to provide a debtor with relief from creditor harassment and give them time to reorganize their finances during bankruptcy. It is designed to stop creditors from taking aggressive or unfair collection actions, and it also ensures that any assets turned over by the debtor will be distributed fairly without giving preference to any creditors.