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 five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for five 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 five 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 $394,725 and secured debts are less than $1,184,200. 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 $235.00 case filing fee and a $75 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.

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 75 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.

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 75 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);

(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 no dischargeable 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;

(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 no dischargeable in a chapter 7 case.