What is Chapter 13 Bankruptcy?
Chapter 13 is also known as “debt adjustment” or the “wage earner’s plan”. This chapter of bankruptcy is designed for the individual that earns a recurring income and will, in time, be able to repay either all or a part of their debt. During the chapter 13 process the debtor may put forward a plan to pay creditors over a period of 3 to 5 years.
During the time that the debtor is making payments to the creditors, the laws of bankruptcy do not allow the creditors to initiate or continue collection of the debt owed. If the debtor’s income is below the state median income, they will be given a payment plan of 3 years unless the court allows a longer time frame. If the debtor’s income is above the state median, then the payments will be for a 5 year period. Chapter 13 does not allow payment plans for longer than 5 years.
The Benefits of Chapter 13
Chapter 13 differentiates itself from Chapter 7 by avoiding liquidation, which may allow the debtor to halt any foreclosure that may be in progress. Unlike Chapter 7 however the debt will not be discharged and the debtor must continue to make mortgage payments within the Chapter 13 plan. Chapter 13 also allows the debtor to reschedule debts that are secured and potentially lower the payments as a result of the time frame allowed. While the debtor is under Chapter 13 protection, a trustee of the court makes all payments to creditors and therefore the debtor is not required to maintain communication with any of the creditors.
Eligibility Under Chapter 13
*The requirements for eligibility under Chapter 13 are as follows:
1. The debtor may not be a corporation or partnership
2. Unsecured debts under $336,900
3. Secured debts under $1,010,650
*These numbers may be adjusted and dependant on the current consumer price index.
Chapter 13 Caveats
Similar to Chapter 7 bankruptcy, 180 days prior to filing for Chapter 13 bankruptcy, the individual filing must not have had a bankruptcy case dismissed due to “willful failure to appear” during a previous bankruptcy case or failed to comply with court orders in a previous case. Also the person filing for Chapter 13 must have received credit counseling from an approved agency in either a private meeting or a group setting.
Filing for Chapter 13 Bankruptcy
An individual may begin the process by filing a petition with the closest bankruptcy court available. In addition to the petition, most individuals will also have to file the following:
1. A Schedule of Assets and Liabilities
2. A Schedule of Expenditures and Current Income
3. Your Statement of Financial Affairs
4. A Schedule of Unexpired Leases and Executory Contracts
5. Certificate of Credit Counseling
6. Debt Repayment Plan (If one was developed during credit counseling)
7. Proof of Employer Payments (if any) Within 60 Days of Filing
8. Monthly Income Statement
9. Statement of Anticipated Income Increases or Expenses After Filing
10. Record of State or Federal Tuition Accounts (If Any)
11. A Copy of the most recent Tax Return
12. Either the Husband or Wife may file a joint or individual petition
The official forms can be downloaded from: http://www.uscourts.gov/bkforms/index.html
These Forms not available from the court.
In addition to the items listed above, in order to complete filing for Chapter 13, the debtor must also assemble the following information:
1. A list of the Creditors (the people or institutions that you owe money to) and what their claim is.
2. Your income sources, how often you get paid and how much you get paid.
3. A list of the property that you own.
4. A comprehensive list of your living expenses including food, rent, mortgage etc.
If a married couple is filing as an individual they must include the financial information of their spouse as well so the court may have an accurate understanding of the financial situation.
How Much Does it Cost to File Chapter 13 Bankruptcy?
The courts will charge $235 to file a bankruptcy case and $39 for a miscellaneous administrative fee. If the individual filing for bankruptcy cannot afford to pay this amount in one lump sum, the court may create a payment plan for the individual(s) filing.
After Filing for Chapter 13 Bankruptcy
Once you have completed all of the forms and provided the information requested by the court, if accepted, your bankruptcy case will be filed. Immediately upon filing the case most common creditor actions will cease. The bankruptcy clerk is responsible for notifying the creditors that the case has been filed. This means that repossession of property, wage garnishments and collection agency phone calls will stop. These are the same creditors that the debtor has provided during their disclosures via the bankruptcy forms, schedules and statements. If you have a home that is undergoing foreclosure these proceedings will stop as long as the petition has been filed before the mortgage company has completed the foreclosure.
The Creditors Meeting
A meeting of the creditors will take place no later than 60 days after a Chapter 13 bankruptcy petition has been filed. During the meeting the debtor will be placed under oath and will be asked questions from their creditors about their current financial situation and the suggested terms of the bankruptcy plan.
The debtor would be well advised to seek council with the trustee prior to this meeting to be sure that the plan and the petition are in order. After this meeting has been concluded, all of the parties legally involved in the Chapter 13 bankruptcy will attend the bankruptcy hearing in court to listen to the Chapter 13 bankruptcy repayment plan.
The Confirmation Hearing
In most cases the Chapter 13 debtor will file a repayment plan within 15 of filing the bankruptcy petition. If the debtor needs more time the judge may allow an extension. The debtor’s plan must be presented to the court for examination and approval. Typically the plan will consist of recurring payments on a fixed schedule. The trustee is the court appointed individual that will distribute the money to the creditors in accordance with the repayment plans.
Creditor Claims
There are 3 basic creditor claims.
1. Secured Claims
2. Unsecured Claims
3. Priority Claims
Creditors receive priority claims in accordance with bankruptcy laws. Examples of priority claims would be taxes and also the costs incurred during a bankruptcy proceeding. Secured claims may include certain property or collateral that could be collected by the creditor if the debtor has not paid the debt owed. Claims that are unsecured by creditors do not receive special treatment by the bankruptcy court and no property may be collected against this debt.
Chapter 13 Repayment
The debtor has 30 days after filing the Chapter 13 bankruptcy case to begin making their repayments to the court appointed trustee. Even if the court has not approved the plan, the payments must begin within this time frame. If any of the payments for a secured loan comes due prior to court approval of the repayment plan, it is still the debtor’s responsibility to make the same payment to the creditor as would be made to the trustee under the repayment plan. Within 45 days of the creditors meeting, the judge in the bankruptcy case will hold a hearing to confirm or deny the feasibility of the repayment plan.
If the judge approves the repayment plan and there are no creditor objections under consideration by the court, then the trustee will begin distributing the funds according to the approved plan. If the court does not approve the plan then their may be a modification of the existing plan or another plan may be presented to the court.
Assuming that the court has approved the debtor’s plan, the debtor will begin to make regular payments to the trustee of the bankruptcy court. The debtor is allowed to keep property as long as the payments continue, however the debtor may not incur additional debt as this could jeopardize the debtor’s ability to make repayment. If the debtor fails to make the agreed upon payments to the court trustee during the case, then the court may dismiss the case or convert it to liquidation under Chapter 7 bankruptcy.
Chapter 13 Discharge
Debtors under Chapter 13 may have their debts discharged after completing their payment plan in accordance with the rules of the bankruptcy court unless the following conditions exist:
1. The Debtor has not received a discharge within the last 2 years (Chapter 13 Only)
2. Domestic support obligations have been paid.
3. Has completed a financial management course approved by the court.
After the discharge is complete, creditors (in most cases) may not pursue legal action against the debtor. The discharge releases the debtor from all debts allowed under the Chapter 13 bankruptcy case.
Debts that cannot be discharged in Chapter 13 may include child support, alimony, taxes a home mortgage, personal injury debts and other debts that are listed under the Chapter 13 bankruptcy code.
Hardship Discharges
A debtor who cannot complete their repayment plan may be allowed a hardship discharge. The hardship discharge may be available under the following circumstances.
1. The debtor cannot make the payments agreed upon because of circumstances beyond their control.
2. The creditors in the case have already received as much as they would have received in a Chapter 7 bankruptcy case.
3. Due to injury or illness the debtor is unable to earn the money required for repayment.
A Bankruptcy Attorney
Due to the complexities of bankruptcy law, it is highly recommended that at debtor retain legal council prior to filing for any of the bankruptcy chapters.
The information on this website is a general overview of bankruptcy chapters and do not contain all information relevant to a bankruptcy case.
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