Personal BankruptcyChapter 13 Bankruptcy Basics

Chapter 13 Bankruptcy Basics

This type of bankruptcy adjusts debts of an individual with regular income. Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years. A chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to repay all or part of their debts. Debtors propose a repayment plan to make installments to creditors over three to five years. The plan is approved and administered by a bankruptcy trustee. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years. The court can approve a longer period “for cause.”


Five Year Plan

If the debtor’s current monthly income is greater than the state median, the plan must be for five years. A plan cannot provide for payments longer than five years.  During this time the law forbids creditors from starting or continuing collection efforts.


Advantages of Chapter 13

Chapter 13 offers individuals a number of advantages over liquidation under Chapter 7. Chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings. Also, they may cure overdue mortgage payments over time. Nevertheless, they must still make all mortgage payments during the chapter 13 plan on time.


Reschedule Secured Debts

Chapter 13 allows individuals to reschedule secured debts and extend them over the life of the plan. This may lower the monthly payments. Chapter 13 also has a provision to protect third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers. Finally, chapter 13 acts like a consolidation loan. The individual makes the plan payments to a chapter 13 trustee. The trustee then distributes payments to creditors. Individuals have no direct contact with creditors while under chapter 13 protection.


Chapter 13 Eligibility

Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13. But the individual’s unsecured debts must be less than $394,725 and secured debts less than $1,184,200. These amounts are adjusted with the consumer price index. A corporation or partnership may not be a chapter 13 debtor.

You cannot file if a prior petition was dismissed due to willful failure to appear in court. The debtor must also comply with orders of the court.


Credit Counseling

No individual may be a debtor under chapter 13 unless she has received credit counseling from an approved credit counseling agency. This can be done either in an individual or group briefing. It must be done within 180 days prior to filing. There are exceptions in emergency situations.


How Chapter 13 Works

A chapter 13 case begins when the debtor files a petition. The debtor must file with the court serving the area where the debtor resides.  The debtor must also file:

  1. schedules of assets and liabilities
  2. a schedule of income and expenses
  3. a schedule of contracts and leases
  4. a financial statement.


Certificate of Credit Counseling

First, the debtor must also file a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling. Second, the petitioner must provide evidence of payment from employers received 60 days before filing. Also, the petitioner must provide a statement of monthly net income and any anticipated increase in income or expenses after filing. Finally, the petitioner must provide a record of any interest carried in federal or state qualified education or tuition accounts.

The petitioner must provide the trustee with the tax return for the most recent tax year as well as returns filed during the case. This includes tax returns for prior years that had not been filed when the case began.  A husband and wife may file a joint petition or individual petitions.


Filing Fees

The courts charge a $235 case filing fee and a $75 miscellaneous administrative fee. Normally you must pay the clerk of the court upon filing. With the court’s permission, however, you may pay installments.


Installment Payment of Fees

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. If a joint petition is filed, only one filing fee and one administrative fee are charged. Debtors should be aware that failure to pay these fees may result in dismissal of the case.


Official Bankruptcy Forms

The debtor must compile the following information:

  1. List all creditors and the amounts and nature of their claims
  2. Source, amount, and frequency of the debtor’s income
  3. List of all of the debtor’s property
  4. Monthly living expenses

Married individuals must gather this information for their spouse even if they are filing separate individual petitions, or only one spouse is filing. If only one spouse files, the income and expenses of the non-filing spouse is required to evaluate the household’s financial position.

Impartial Trustee

When an individual files a chapter 13 petition, an impartial trustee is appointed to administer the case. The trustee both evaluates the case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors.


Automatic Stay

Filing the petition under chapter 13 “automatically stays” (stops) most collection actions. However, filing the petition does not stay certain types of actions. The stay arises by operation of law and requires no judicial action.

As long as the stay is in effect, creditors should not initiate or continue lawsuits, wage garnishments, or make telephone calls to demand payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors.


Co-Debtor Protections

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

Individuals may use a chapter 13 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.


Typical Schedule

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.


Debtor Meeting

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


Creditor Claims

In a chapter 13 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. A governmental unit, however, has 180 days from the date the case is filed file 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.


The Chapter 13 Plan and Confirmation 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 biweekly 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

There are three types of claims: priority, secured, and unsecured. Priority claims are those granted special status by the bankruptcy law, such as most taxes and the costs of bankruptcy proceeding. (3) Secured claims are those for which the creditor has the right take back certain property (i.e., the collateral) if the debtor does not pay the underlying debt. 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.


Priority Claims

The plan must pay priority claims in full unless a particular priority creditor agrees to different treatment of the claim. Domestic support obligations are priority, unless the debtor contributes all “disposable income” .

The debtor may keep the collateral securing a claim. But the holder of that claim must get at least the value of the collateral. If the obligation underlying the secured claim was used to buy the collateral, the plan must provide for full payment of the debt, not just the value of the collateral (which may be less due to depreciation).

Payments to mortgage creditors may be made over the original loan schedule (which may be longer than the plan).  However, any arrearage must be made up during the plan. The debtor should consult an attorney to determine the proper treatment of secured claims.


Unsecured Claims

The plan need not pay unsecured claims in full as long it provides that the debtor will pay all projected “disposable income” over an “applicable commitment period,” and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor’s assets were liquidated under chapter 7. “Disposable income” is income (other than child support payments received by the debtor) less amounts reasonably necessary for the maintenance or support of the debtor or dependents and less charitable contributions up to 15% of the debtor’s gross income.


Business Ownership

If the debtor operates a business, he can exclude ordinary operating expenses.


Within 30 days after filing the bankruptcy case, the debtor must start making payments to the trustee. The debtor must do this even if the plan has not yet been approved. If any secured loan payments or lease payments come due before the debtor’s plan is confirmed the petitioner must make payments. The petitioner must pay home mortgage and auto payments directly.  The petitioner can deduct the amounts paid from what would otherwise be paid to the trustee.


Confirmation Hearing

No later than 45 days after the meeting of creditors, the bankruptcy judge must hold a confirmation hearing. The judge must decide whether the plan is feasible and meets the standards for confirmation. Creditors will receive 28 days’ notice of the hearing and may object to confirmation.

Frequently creditors object if payments under the plan are less than what creditors would receive if the assets were liquidated. Also, creditors object if the plan does not commit all of the debtor’s projected disposable income.

If the court confirms the plan, the chapter 13 trustee will distribute funds received under the plan “as soon as is practicable.” If the court declines to confirm the plan, the petitioner may file a modified plan. The petitioner may also convert the case to a liquidation case under chapter 7.

If the court declines to confirm the plan, the trustee may keep some funds for costs. However, the trustee must return all remaining funds to the petitioner. The trustee may not return funds already disbursed or due to creditors.


Payment Plan

Occasionally, a change in circumstances may compromise the debtor’s ability to make plan payments. For example, a creditor may object or threaten to object to a plan. Or the debtor may inadvertently have failed to list all creditors. In such instances, the plan may be modified before or after confirmation. Modification after confirmation is not limited to an initiative by the debtor. The trustee or an unsecured creditor may request a modification to the plan.


Making the Plan Work

The provisions of a confirmed plan bind the debtor and each creditor. Once the court confirms the plan, the debtor must make the plan succeed. The debtor must make regular payments to the trustee. The debtor can pay directly or through payroll deduction. The plan entitles the petitioner to retain property as long as payments are made. However, he may not incur new debt without consulting the trustee. Additional debt may compromise the debtor’s ability to complete the plan.


Payroll Deductions

A debtor may make plan payments through payroll deductions. This increases the likelihood that payments will be made on time and  the debtor will complete the plan. If the debtor fails to make the payments due, the court may dismiss the case or convert it to a liquidation case.


Domestic Support

The court may also dismiss or convert the debtor’s case if he fails to pay any post-filing domestic support obligations. Domestic support includes child support and alimony.


The Chapter 13 Discharge

The bankruptcy law is complex and has recently undergone major changes. Therefore, debtors should consult legal counsel prior to filing. A Bankruptcy Attorney can advise the debtor about the scope of Chapter 13.

A chapter 13 debtor is entitled to a discharge upon completion of all payments under the plan. The discharge requires the debtor certify any domestic support obligations that came due or have been paid. The debtor cannot receive a discharge in a prior case filed within  2 years. Finally, the debtor must complete an approved course in financial management.

The court must also determine that there are no pending proceedings that might affect the debtor’s homestead exemption.


Release of Debts

The discharge releases the debtor from all debts provided for by the plan, with limited exceptions. Creditors listed in the plan may no longer initiate or continue any collection action against the debtor.

Debts not discharged in chapter 13 include certain long term obligations (such as a home mortgage) and debts for alimony or child support. In addition, certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments are not discharged. Debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs are not covered. Finally, debts for restitution or a criminal fine included in a sentence on the debtor’s conviction of a crime are not discharged.

The Chapter 13 Hardship Discharge

After confirmation of a plan, circumstances may arise that prevent the debtor from completing the plan. In such situations, the debtor may ask the court to grant a “hardship discharge.”


Requirements for Hardship Discharge

Debtors who fail to make payments because of circumstances beyond their control can get a hardship discharge. If the debtor cannot make the payments through no fault of their own, they may qualify. Or if the creditors have received at least as much as they would have received in Chapter 7. If a petitioner is injured and cannot get a job that will fund even a modified plan, a hardship discharge can apply.


For more information about Chapter 13 Bankruptcy see United States Courts