Chapter 13 bankruptcy – all you need to know

This chapter of the Bankruptcy Code provides for adjustment of debts for an individual with regular income. Chapter 13 allows a debtor to keep his property and pay debts over time, usually  in between three and five years.  Let’s look at Chapter 13 bankruptcy definition and explore what it can offer.

What is bankruptcy (chapter 13)

A chapter 13 bankruptcy, also called a wage earner’s plan, enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors in over three to five years. If the debtor’s current monthly income is less than the applicable state median, it will be a three-year plan unless the court approves a longer period “for cause.” If the debtor’s current monthly income is greater than the applicable state median, the plan must be for five years generally. In no case may a plan provide for payments over a period longer than five years. During this time, the law forbids creditors from starting or continuing collection efforts.

Advantages of Chapter 13 bankruptcy

Advantages of Chapter 13 bankruptcy
Advantages of Chapter 13 bankruptcy

Chapter 13 offers individuals a number of advantages over liquidation under Chapter 7.

The most significant is perhaps the opportunity Chapter 13 offers individuals to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they still must make all mortgage payments that are due during the Chapter 13 plan on time.

Another advantage of Chapter 13 bankruptcy is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the Chapter 13 bankruptcy plan.  By doing this, you may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers. Lastly, Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a Chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under Chapter 13 protection.

Chapter 13 eligibility

Any individual, including self-employed or operating an unincorporated business, is eligible for Chapter 13 relief as long as the individual’s unsecured debts are less than $383,175 and secured debts are less than $1,149,525. These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a Chapter 13 bankruptcy debtor.

An individual cannot file under Chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s wilful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. In addition to that, no individual may be a debtor under Chapter 13 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. However, there are exceptions in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during the required credit counseling, it must be filed with the court.

How it works

How it works
How it works

A Chapter 13 bankruptcy case begins with filing a petition with the bankruptcy court serving the area where the debtor has a domicile or residence. Unless the court orders otherwise, the debtor must also file with the court the following:

1. schedules of assets and liabilities

2. a schedule of current income and expenditures

3. a schedule of executory contracts and unexpired leases

4. a statement of financial affairs

The debtor must also file a certificate of credit counseling, a copy of any debt repayment plan developed through credit counseling, evidence of payment from employers (if any) received 60 days before filing, a statement of monthly net income and any anticipated increase in income or expenses after filing, plus a record of any interest the debtor has in federal or state qualified education or tuition accounts. The debtor must provide the Chapter 13 case trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began). A husband and wife may file a joint or individual petitions.

The courts must charge a $235 case filing fee and a $75 miscellaneous administrative fee. Usually, the fees must be paid to the clerk of the court upon filing. However,  with the court’s permission, they may be paid in installments. The number of installments is limited to four, and the debtor must make the final installment no later than 120 days after filing the petition.

For cause shown, the court may extend the time of any installment as long as the last installment is paid no later than 180 days after filing the petition. The debtor may also pay the $75 administrative fee in installments. Only one filing fee and one administrative fee are charged If a joint petition is filed. Debtors should be aware that failure to pay these fees may result in case dismissal.
To complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs and schedules, the debtor must compile the following information:

1. A list of all creditors and the amounts and nature of their claims

2. The source, amount, and frequency of the debtor’s income

3. A list of all of the debtor’s property

4. A detailed list of the debtor’s monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc

Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse is required so that the court, the trustee and creditors can evaluate the household’s financial position.

 When an individual files a Chapter 13 petition
When an individual files a Chapter 13 petition

When an individual files a Chapter 13 bankruptcy petition, an impartial trustee is appointed to administer the case. In some districts, the U.S. trustee or bankruptcy administrator appoints a standing trustee to serve in all Chapter 13 cases. The Chapter 13 trustee evaluates the case as well as serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors.

Filing the petition under Chapter 13 “automatically stays” (stops) most collection actions against the debtor or the debtor’s property. However, filing the petition does not stay certain types of actions and the stay may be effective only for a short time in some situations. The stay arises by operation of law and requires no judicial action. Creditors generally may not initiate or continue lawsuits, wage garnishments or even make telephone calls demanding payments as long as the stay is in effect. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.

Chapter 13 also contains a special automatic stay provision that protects co-debtors. A creditor may not seek to collect a “consumer debt” from any individual who is liable along with the debtor, unless the bankruptcy court authorizes otherwise. Consumer debts are those incurred by an individual primarily for a personal, family or household purpose.

Individuals may use a Chapter 13 bankruptcy proceeding to save their home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as the individual files the Chapter 13 petition. The individual may then bring the past-due payments current over a reasonable period of time. Nevertheless, the debtor may still lose the home if the mortgage company completes the foreclosure sale under state law before the debtor files the petition. The debtor may also lose the home if he or she fails to make the regular mortgage payments that come due after the Chapter 13 filing.

Creditors meeting

Between 21 and 50 days after the debtor files the Chapter 13 petition, the Chapter 13 trustee will hold a meeting of creditors. If the U.S. trustee or bankruptcy administrator schedules the meeting at a place that does not have regular U.S. trustee or bankruptcy administrator staffing, the meeting may be held no more than 60 days after the debtor files. During this meeting, the trustee places the debtor under oath and both the trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding his or her financial affairs and the proposed terms of the plan.

If a husband and wife filed a joint petition, they both must attend the creditors’ meeting and answer questions. To preserve their independent judgment, bankruptcy judges are prohibited from attending the creditors’ meeting. The parties normally resolve problems concerning the plan either during or shortly after the creditors’ meeting. Generally, the debtor can avoid problems by consulting with the trustee prior to the meeting and by making sure that the petition and plan are complete and accurate.

In a Chapter 13 bankruptcy case, to participate in distributions from the bankruptcy estate, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors. However, a governmental unit has 180 days from the date the case is filed a proof of claim.

After the meeting of creditors, the debtor, the Chapter 13 trustee and those creditors who wish to attend will come to court for a hearing on the debtor’s Chapter 13 repayment plan.

Chapter 13 bankruptcy plan and conformation hearing

Unless the court grants an extension, the debtor must file a repayment plan with the petition or within 14 days after the petition is filed. A plan must be submitted for court approval and must provide for payments of fixed amounts to the trustee on a regular basis, typically weekly or monthly. The trustee then distributes the funds to creditors according to the terms of the plan which may offer creditors less than full payment on their claims.

types of claims
types of claims

There are three types of claims: priority, secured, and unsecured.

1. Priority claims are those granted special status by the bankruptcy law, such as most taxes and the costs of bankruptcy proceeding.

2. Secured claims are those for which the creditor has the right to take back certain property (i.e., the collateral) if the debtor does not pay the underlying debt.

3. In contrast to secured claims, unsecured claims are generally those for which the creditor has no special rights to collect against particular property owned by the debtor.

If the debtor wants to keep the collateral securing a particular claim, the plan must provide that the holder of the secured claim receive the value of the collateral at least. If the obligation underlying the secured claim was used to buy the collateral (e.g., a car loan) and the debt was incurred within certain time frames before the bankruptcy filing, the plan must provide for full payment of the debt, not just the value of the collateral.

Making the plan work

The provisions of a confirmed plan bind the debtor and each creditor. Once the plan is confirmed by the court, the debtor must make the plan work. The debtor must make regular payments to the trustee either directly or through payroll deduction which will require adjustment to living on a fixed budget for a prolonged period. Furthermore, while confirmation of the plan entitles the debtor to retain property as long as payments are being made, the debtor may not incur new debt without consulting the trustee. This is because additional debt may compromise the debtor’s ability to complete the plan.

A debtor may make plan payments through payroll deductions. This practice increases the likelihood that payments will be made on time and that the debtor will complete the plan. In the event that the debtor fails to make the payments due under the confirmed plan, the court may dismiss the case or convert it to a liquidation case under Chapter 7 of the Bankruptcy Code. The court may also dismiss or convert the debtor’s case if the debtor fails to pay any post-filing domestic support obligations (i.e., child support, alimony) or fails to make required tax filings during the case.

Chapter 13 discharge

Chapter 13 discharge
Chapter 13 discharge

The bankruptcy law regarding the scope of Chapter 13 discharge is complex and has undergone major changes. This means that debtors should consult a competent legal counsel regarding the scope of the Chapter 13 discharge prior to filing.
A Chapter 13 debtor is entitled to a discharge upon completion of all payments under the Chapter 13 plan as long as the debtor:

1. certifies (if applicable) that all domestic support obligations that came due prior to making such certification have been paid

2. has not received a discharge in a prior case filed within a certain time frame (two years for prior Chapter 13 cases and four years for prior Chapter 7, 11 and 12 cases)

3. has completed an approved course in financial management (if the U.S. trustee or bankruptcy administrator for the debtor’s district has determined that such courses are available to the debtor).

However, the court will not enter the discharge until it determines, after notice and a hearing, that there is no reason to believe that there is any pending proceeding that might give rise to a limitation on the debtor’s homestead exemption.

The discharge releases the debtor from all debts provided for by the plan or disallows with limited exceptions. Creditors provided for in full or in part under the Chapter 13 plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.

As a general rule, the discharge releases the debtor from all debts provided for by the plan or disallows with few exceptions. Debts not discharged in Chapter 13 include certain long-term obligations (such as a home mortgage), debts for alimony or child support, certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine included in a sentence on the debtor’s conviction of a crime.

To the extent that they are not fully paid under the Chapter 13 plan, the debtor will still be responsible for these debts after the bankruptcy case has concluded. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for restitution or damages awarded in a civil case for willful or malicious actions by the debtor that cause personal injury or death to a person will be discharged unless a creditor timely files and prevails in an action to have such debts declared nondischargeable.

The discharge in a Chapter 13 case is somewhat broader compared to a Chapter 7 case. Debts dischargeable in Chapter 13 but not in Chapter 7 include debts for wilful and malicious injury to property (as opposed to a person), debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings.

Chapter 13 bankruptcy hardship discharge

After confirmation of a plan, circumstances may arise that prevent debtors from completing their plans. In such situations, the debtor may ask the court to grant a “hardship discharge.” Generally, such a discharge is available only if:

1. the debtor’s failure to complete plan payments is due to circumstances beyond the debtor’s control and through no fault of the debtor

2. creditors have received at least as much as they would have received in a Chapter 7 liquidation case

3. modification of the plan is not possible

Injury or illness that precludes employment sufficient to fund even a modified plan may serve as the basis for a hardship discharge. The hardship discharge is more limited than the discharge described above and does not apply to any debts that are nondischargeable in a Chapter 7 case.