Chapter 13 Bankruptcy is more commonly known as a “wage earner’s plan.” This allows individuals to reorganize all or part of their debts. An important feature of Chapter 13 is that an individual is permitted to keep all their assets while the plan is in effect and after successfully completing it.
Unlike Chapter 7 involving liquidation of assets, a Chapter 13 process involves restructuring debts. Chapter 13 enables the debtor to use whatever income they have or may have in future to pay off creditors.
An individual with regular income is thus eligible to file for bankruptcy under Chapter 13. An individual cannot be a debtor under chapter 13 or any chapter of the Bankruptcy Code unless he or she has received credit counseling from an approved credit counseling agency either in an individual or group briefing, within 180 days before filing. There are exceptions in certain emergency situations, such as where the U.S. trustee determines that there are insufficient approved agencies to provide the required counseling. Section 109(e) of Title 11, Chapter 13 of the United States Code sets forth the unsecured and secured debt limits for filing under Chapter 13, and a corporation or partnership may not be a debtor under Chapter 13. According to sections 109(g), 362(d) and (e) of Title 11 of the United States Code, during the preceding 180 days, if a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after the creditors sought relief from the bankruptcy court to recover property upon which they hold liens, an individual is not permitted to file under Chapter 13 or any other Chapters.
Under Chapter 13, the debtor may propose a plan to repay the creditors over a three to five years period. According to Section 1322(d) of Title 11, Chapter 13 of the United States Code, if the applicable state median is higher than the debtor’s current monthly income, then the plan will be for three years. If the applicable state median is less than the debtor’s current monthly income, the plan will be for five years. The term of a payment plan shall not be more than five years.
Chapter 13 provides individuals a chance to stop foreclosure proceedings and is more advantageous than Chapter 7. Chapter 13 thus provides individuals with an opportunity to cure their delinquent mortgage payments over time. This also allows individuals to reschedule their secured debts and extend them over the Chapter 13 plan tenure. This can reduce the payments. Chapter 13 also protects third parties who are liable with the debtor on “consumer debts” and co-signers.
A major disadvantage under Chapter 13 is that while a bankruptcy case is pending, the debtor is not permitted to obtain additional credit without the permission of the bankruptcy court. This disadvantage is common to Chapter 7, Chapter 11 and Chapter 12 bankruptcy cases.
A Chapter 13 case commences when an individual files a petition with the bankruptcy court. The debtor has to file the following:
- Statement of assets and liabilities;
- Statement of present income and expenditures;
- Statement of Executory contracts;
- Statement of unexpired leases;
- Statement of financial affairs:
- Certificate of credit counseling;
- Copy of debt repayment plan;
- Evidence of payment from employees, if any, received 60 days prior to the filing date;
- Statement of monthly income;
- Statement of anticipated increase in income or expenditure after filing;
- Record of any interest in qualified education or tuition accounts.
The debtor has to provide the trustee with a copy of most recent tax returns, tax returns filed during the case and tax returns for prior years that had not been filed when the case began. A married couple may either file a joint petition or separate individual petitions. The case filing fee of $235 and the miscellaneous administrative fee of $39 is to be paid to the clerk of the court upon filing the petition. The case filing fee and miscellaneous administrative fee shall be paid in installments.
Normally, number of installments is limited to four with the final installment being made not later than 120 days from the date of filing the petition. On reasonable grounds, court can extend the time of any installment; however it should be paid within 180 days from the date of filing the petition. Failure to pay the fees shall result in dismissal of the case.
A debtor is also required to compile information regarding creditors, amounts, nature of claims, source of debtor’s income, amount of debtor’s income, list of all of the debtor’s property, debtor’s living expenses including expenses related to food, clothing, shelter, utilities, taxes, medicine, transportation, etc. With regard to married couple, in instances where only one spouse files, the non-filing spouse’s income and expenditure is also required for the court, trustee and creditors to evaluate the household’s financial position.
An impartial trustee is appointed to manage and administer the case when a petition is filed under Chapter 13. The trustee acts as a disbursing agent. The trustee collects the payments from debtor and makes appropriate distributions to creditors. Once a petition is filed under Chapter 13, collection actions against the debtor is stayed automatically. Creditors are not allowed to initiate or pursue lawsuits, wage garnishments, or make any communications demanding payments from debtors when the stay is in effect. Not all actions can be stayed.
Special automatic stay provision under Chapter 13 prohibits creditors from collecting “consumer debt” from individuals who are liable along with debtor. Debts incurred by individuals for personal, household, or family purpose are referred to as consumer debts.
The chapter 13 trustee holds a meeting of creditors between 20 and 50 days after the debtor files a petition. The debtor has to attend the meeting and answer questions related to the financial affairs and proposed terms of the plan. In situations where a married couple files joint petition, they both have to attend the creditors’ meeting. Bankruptcy judges are prohibited from attending the creditors’ meeting for the sake of preserving independent judgment. Before the meeting, debtor can consult with the trustee to ensure that the plan and petition are correct and complete. Unsecured creditors has to file their claims within 90 days after the first date set for the meeting of creditors and a governmental unit is allowed to file the claims within 180 days from the date the case is filed.
A debtor must file a plan along with the petition or within 15 days after filing of the petition. A plan contains the details regarding the treatment of debts, liens, and secured assets and liabilities owned or owed by debtor. The trustee distributes the funds to creditors in accordance with the terms of the plan. Of the three claims, priority, secured and unsecured, the plan should pay off priority claims in full unless a specific priority creditor opts for different treatment of the claim.
If an obligation underlying the secured claim was used to buy collateral, the plan must provide for full payment of the debt where debt was incurred within certain time limits before the bankruptcy filing. The debtor can determine the proper treatment of secured claims in the plan after consulting an attorney. The plan need not make payment of unsecured claims in full until it provides that the debtor will pay all projected disposable income over an applicable commitment period.
Disposable income is the income excluding the reasonable expenditure necessary for the maintenance or support of the debtor or dependents and excluding other charitable contributions up to fifteen percent of the gross income of the debtor [disposable income = income – (maintenance or support amount of debtor or dependents + charitable contributions up to 15% of the debtor’s gross income)]. Also the plan need not make payment of unsecured claims in full until the unsecured creditors receive as much as they would if debtor’s assets were liquidated under Chapter 7. If suppose, the debtor is engaged in a business, then the debtor’s disposable income would exclude the necessary ordinary operating expenditure.
Even if the plan is not approved by the court, the debtor should start making payments to trustee within 30 days after filing the bankruptcy case. A bankruptcy judge should hold a confirmation hearing not later than 45 days after meeting of creditors and decide if the plan meets all the standards for confirmation set forth in the Bankruptcy Code. Most common and frequent objections raised by the creditors are: first, that the payments offered under the plan are less than what the creditors would receive if the debtor’s assets were liquidated. Secondly, that the debtor’s plan does not commit all projected disposable income over an applicable commitment period.
Once the court confirms the plan, trustee distributes the funds according to the plan. The debtor can convert the plan and file a modified plan if the court declines confirmation of the plan. If the court dismisses the case, the court may authorize the trustee to keep some funds for costs and the remaining should be returned to the debtor. Modification after confirmation may be at the request of the trustee or an unsecured creditor.
A Chapter 13 debtor is entitled to discharge as long as:
1. Payment of all domestic support obligations due prior to making such certification;
2. Debtor has not received a discharge in a prior case filed within specific time limit; and
3. Debtor has completed an approved financial management course.
Creditors under Chapter 13 Plan provided in full or in part cannot initiate or pursue any legal or other action against the debtor for collecting the discharged obligations. Non-dischargeable debts under Chapter 13 include long term obligations, alimony or child support debts, certain taxes, government funded debts, guaranteed educational loans, death or personal injury debts caused due to intoxication, and restitution debts or criminal fines on debtor’s conviction of a crime.
Willful or malicious injury to property, debts incurred in payment of non-dischargeable tax obligations, and property settlement debts in divorce or separation proceedings are dischargeable under Chapter 13 unlike Chapter 7.
Bankruptcy is complex and with the new laws that went into effect more difficult to handle without an attorney. Talk to a Local Bankruptcy Attorney.