Chapter 13 Bankruptcy
If you are unable to pass the Means test, an income based test, or you would
like to save a home or a vehicle than, Chapter 13 bankruptcy may be your
answer!
A chapter 13 bankruptcy is also called a wage earner's plan. It enables
individuals with regular income to develop a monthly payment plan to repay
all or part of their debts. The monthly payment plan is based on what is called
the debtor’s “disposable income”. Debtors propose a repayment plan to
make installment payments to creditors over three to five years. If the
debtor's current monthly income is less than the applicable state median, the
plan will be for three years unless the court requires a longer period. If the
debtor's current monthly income is greater than the applicable state median,
the plan generally must be for five years. In no case may a plan provide for
payments over a period longer than five years. As long as you are current on
your court approved monthly payment the law forbids creditors from starting
or continuing collection efforts against the Debtor.
Chapter 13 bankruptcy offers individuals a number of advantages over a
Chapter 7 bankruptcy. By filing under this chapter, individuals can stop
foreclosure proceedings and may cure delinquent mortgage payments over a
3 to 5 year period of time. Debtors must still make all of their regular monthly
mortgage payments that come due during the chapter 13 plan. Chapter 13
bankruptcy 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 except for direct payments to certain creditors
approved by the Chapter 13 trustee and court.
Any individual, even if self-employed or operating an unincorporated
business, is eligible for chapter 13 relief as long as the individual's
unsecured debts are less than $360,475 and secured debts are less than
$1,081,400. These amounts are adjusted periodically to reflect changes in the
consumer price index. A LLC, corporation or partnership may not be a chapter
13 debtor.
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.
After the filing of the bankruptcy petition, 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), proof of insurance for any motor vehicles, and
proof of pre-confirmation mortgage payments. The Debtor must have filed the
last four years (4) of tax returns to be eligible for a filing of a Chapter 13 plan.
A husband and wife may file a joint petition or individual petitions. The courts
must charge a $242.00 case filing fee and a $39 miscellaneous administrative
fee. Normally the fees must be paid to the clerk of the court upon filing.
Married individuals must gather all of the above 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, 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 both evaluates the case and 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. Filing the
petition does not, however, 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. As long as the stay is in effect,
creditors generally may not initiate or continue lawsuits, wage garnishments,
or even make telephone calls demanding payments. The bankruptcy clerk
gives notice of the bankruptcy case to all creditors whose names and
addresses are provided by the debtor.
The chapter 13 trustee will hold a meeting of creditors within 30 to 45 days of
the filing of the bankruptcy petition. 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
file a joint petition, they both must attend the creditors' meeting and answer
questions. The parties typically resolve problems with the plan either during
or shortly after the creditors' meeting.
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.
There are three types of creditor 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. 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.
The plan must pay priority claims in full unless a particular priority creditor
agrees to different treatment of the claim or, in the case of a domestic
support obligation, unless the debtor contributes all "disposable income".
If the debtor wants to keep the collateral securing a particular claim, the plan
must provide that the holder of the secured claim receive at least the value
of the collateral. 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 (which may be less
due to depreciation). Payments to certain secured creditors (i.e., the home
mortgage lender), may be made over the original loan repayment schedule
(which may be longer than the plan) so long as any arrearage is made up
during the plan.
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.
In chapter 13, "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. If the debtor operates a
business, the definition of disposable income excludes those amounts which
are necessary for ordinary operating expenses.
No later than 45 days after the meeting of creditors, the bankruptcy judge
must hold a confirmation hearing and decide whether the plan is feasible and
meets the standards for confirmation set forth in the Bankruptcy Code.
Creditors will receive 28 days' notice of the hearing and may object to
confirmation. 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 debtor may file a modified plan.
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 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 made, the debtor may
not incur new debt without consulting the trustee, because additional debt
may compromise the debtor's ability to complete the plan.
A chapter 13 debtor is entitled to a discharge upon completion of all
payments under the chapter 13 plan so 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); and (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). The court will not enter the discharge,
however, until it determines, after notice and a hearing, that there is no
reason to believe 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
disallowed, 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 disallowed, with the exception of certain debts. 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 than in a chapter 7
case. Debts dischargeable in a chapter 13, but not in chapter 7, include debts
for willful and malicious injury to property (as opposed to a person), debts
incurred to pay nondischargeable tax obligations, and debts arising from
property settlements in divorce or separation proceedings.
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." 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; and (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.
The Law Offices of Melissa Raskey