This part of the Bankruptcy Code addresses debt adjustment for individuals with regular income. Chapter 13 bankruptcy allows a person to maintain their property while repaying their obligations over a period of three to five years.
Background
A wage earner's plan is another name for a chapter 13 bankruptcy. It enables people with steady income to create a plan to repay all or portion of their obligations. Debtors offer a repayment plan to creditors in increments over three to five years under this chapter.
If the debtor's current monthly income is less than the appropriate state median, the plan will last three years, unless the court grants an extension "for reason." (1) If the debtor's current monthly income exceeds the appropriate state median, the plan must normally last five years.
A plan may not arrange for payments to be made over a period of more than five years. 11 U.S.C. § 1322(d) (d). During this time, creditors are not permitted to begin or continue collection operations.
This chapter examines six features of a chapter 13 process: the benefits of filing under chapter 13, the eligibility requirements for filing under chapter 13, how a chapter 13 proceeding works, making the plan work, and the unique chapter 13 discharge.
Benefits of Chapter 13
Individuals have a variety of benefits over liquidation under Chapter 7. Perhaps most importantly, Chapter 13 allows people to save their houses from being foreclosed on. Individuals can suspend foreclosure proceedings and perhaps cure outstanding mortgage payments over time by filing under this provision.
Nonetheless, they must continue to make all mortgage payments due throughout the chapter 13 plan on schedule. Another benefit of Chapter 13 is that it allows people to reschedule secured obligations (other than a mortgage on their principal property) and spread them out over the course of the plan. This may result in decreased compensation.
Third parties that are responsible alongside the debtor on "consumer debts" are similarly protected under Chapter 13. This clause may safeguard co-signers. Finally, chapter 13 functions similarly to a consolidation loan in that the individual pays plan payments to a chapter 13 trustee, who distributes payments to creditors. Individuals seeking chapter 13 protection will have no direct communication with creditors.
Eligibility in Chapter 13
Any individual, even if self-employed or running an unincorporated business, is eligible for chapter 13 relief if their total secured and unsecured obligations are less than $2,750,000 as of the day they file for bankruptcy protection. 11 U.S.C. § 109(e) (e).
An individual cannot file under Chapter 13 or any other chapter if, within the previous 180 days, a previous bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with court orders, or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property on which they have liens. 11 USC 109(g), 362(d), and (e).
Furthermore, no individual may be a debtor under Chapter 13 or any other chapter of the Bankruptcy Code unless he or she has received credit counseling from a recognized credit counseling organization, either individually or in a group briefing, within 180 days before filing. 11 U.S.C. §§ 109, 111.
There are exceptions in cases of urgency or where the United States trustee (or bankruptcy administrator) determines that there are insufficient approved agencies to offer the requisite counseling. A debt management plan must be filed with the court if it is prepared during compulsory credit counseling.
How Chapter 13 Functions
A chapter 13 case begins with the filing of a petition with the bankruptcy court serving the debtor's domicile or abode. Unless the court rules differently, the debtor must also file: (1) schedules of assets and liabilities; (2) schedules of current income and expenditures; (3) schedules of executory contracts and unexpired leases; and (4) a statement of financial affairs with the court. P. 1007, Fed. R. Bankr (b).
The debtor must also file a credit counseling certificate and a copy of any debt repayment plan developed through credit counseling; proof of payment from employers, if any, received 60 days prior to filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts. 11 U.S.C. § 521.
The debtor must furnish the chapter 13 case trustee with a copy of the most current tax return or transcripts, as well as any tax returns filed throughout the case (including tax returns for prior years that had not been filed when the case began). Id. A husband and wife may submit either a combined or individual petition. 11 U.S.C. § 302(a) (a). (The Official Forms are available for purchase at legal supply stores or can be obtained from the Internet at www.uscourts.gov/bkforms/index.html. They cannot be obtained from the court.)
The courts must collect a case filing cost of $235 and a miscellaneous administration fee of $75. Normally, fees must be paid to the clerk of the court at the time of filing. They may, however, be paid in installments with the court's consent. Bankruptcy Court Miscellaneous Fee Schedule, Item 8; 28 U.S.C. 1930(a); Fed. R. Bankr. P. 1006(b); The debtor must make the final installment no later than 120 days after filing the petition, and the number of installments is restricted to four. P. 1006 Fed. R. Bankr (b).
The court may extend the time for any installment for reason proven, as long as the last installment is paid no later than 180 days after the petition is filed. Id. In addition, the debtor may pay the $75 administrative charge in installments. When a joint petition is filed, there is just one filing fee and one administrative fee. Debtors should be informed that failing to pay these costs may result in the case being dismissed. 11 U.S.C. § 1307(c)(2) (2).
The debtor must gather the following information in order to complete the Official Bankruptcy Forms, which comprise the petition, statement of financial affairs, and schedules:
A list of all creditors, together with the amounts and types of claims they have;
The debtor's source, quantity, and frequency of income;
a list of all the debtor's assets; and
A thorough breakdown of the debtor's monthly living expenditures, such as food, clothes, shelter, utilities, taxes, transportation, medication, and so on.
Married people must acquire this information for their spouse whether they file a joint petition, separate individual petitions, or even if only one spouse files. When only one spouse files, the income and spending of the non-filing spouse must be disclosed so that the court, trustee, and creditors may assess the household's financial state.
When a person files a chapter 13 petition, an impartial trustee is appointed to oversee the proceedings. 11 U.S.C. § 1302. The United States trustee or bankruptcy administrator (2) appoints a standing trustee to serve in all chapter 13 cases in some districts. 28 U.S.C. § 586(b) (b). The chapter 13 trustee examines the case while also acting as a disbursing agent, collecting payments from the debtor and distributing funds to creditors. 11 U.S.C. § 1302(b) (b).
When a chapter 13 petition is filed, most collection proceedings against the debtor or the debtor's property "automatically stay" (end). 11 U.S.C. § 362. Filing the petition, however, does not stay certain sorts of acts enumerated in 11 U.S.C. 362(b), and the stay may only be valid for a limited period in particular cases.
The stay is granted by operation of law and does not need judicial intervention. Creditors may not commence or pursue litigation, income garnishments, or even make phone calls seeking payment while the stay is in force. The bankruptcy clerk serves notice to all creditors whose names and addresses are given by the debtor.
Co-debtors are additionally protected by an unique automatic stay clause in Chapter 13. A creditor may not seek to collect a "consumer debt" from any individual who is responsible together with the debtor unless the bankruptcy court approves differently. 11 U.S.C. § 1301(a) (a). Consumer debts are ones accumulated largely by an individual for personal, family, or home purposes. 11 U.S.C. § 101(8). (8).
Individuals may utilize a chapter 13 action to avoid foreclosure on their house. The foreclosure procedure is halted by the automatic stay as soon as the individual submits the chapter 13 petition. The individual can then bring the past-due payments up to date over a reasonable time period.
Nonetheless, if the mortgage company completes the foreclosure sale under state law before the debtor submits the petition, the debtor may still lose the house. 11 U.S.C. § 1322(c) (c). If the debtor fails to make the monthly mortgage payments that become due after the chapter 13 filing, the debtor may lose the house.
The chapter 13 trustee will conduct a meeting of creditors between 21 and 50 days after the debtor submits the chapter 13 petition. If the meeting is scheduled by the U.S. trustee or bankruptcy administrator at a location that does not have regular U.S. trustee or bankruptcy administrator staffing, the meeting must take place no later than 60 days after the debtor files. 2003, Fed. R. Bankr. P. (a).
During this meeting, the trustee administers an oath to the debtor, and both the trustee and creditors may ask questions. The debtor is required to attend the meeting and answer questions about his or her financial situation as well as the suggested parameters of the plan. 11 U.S.C. § 343. If a husband and wife submit a joint petition, they must both appear and answer questions at the creditors' meeting.
Bankruptcy judges are not permitted to attend the creditors' meeting in order to maintain their independence. 11 U.S.C. § 341(c) (c). Problems with the plan are usually resolved during or shortly after the creditors' meeting. In general, the debtor may prevent complications by ensuring that the petition and plan are thorough and precise, as well as speaking with the trustee before the meeting.
To participate in distributions from the bankruptcy estate in a chapter 13 case, unsecured creditors must submit their claims with the court within 90 days of the first date established for the creditors' meeting. P. 3002 Fed. R. Bankr (c). However, a governmental entity has 180 days from the moment the complaint is filed to file a proof of claim. 11 U.S.C. § 502(b)(9) (9).
Following the creditors' conference, the debtor, the chapter 13 trustee, and any creditors who desire to attend will appear in court to hear the debtor's chapter 13 repayment plan.
Confirmation Hearing and Chapter 13 Plan
Unless the court permits an extension, the debtor must present a repayment plan with the petition or within 14 days of its filing, whichever comes first. P. 3015, Fed. R. Bankr. A plan must be presented to the court for approval and must provide for regular payments of specified sums to the trustee, often biweekly or monthly. The money are subsequently distributed among creditors in accordance with the conditions of the plan, which may provide creditors with less than full payment on their claims.
Priority, secured, and unsecured claims are the three sorts of claims. Priority claims are those afforded priority treatment by bankruptcy law, such as most taxes and bankruptcy expenses. (3) Secured claims are those in which the creditor has the right to repossess specific property (i.e., the collateral) if the debtor fails to pay the underlying obligation. Unsecured claims, in contrast to secured claims, are typically those for which the creditor has no special rights to collect against specific property possessed by the debtor.
Unless a specific priority creditor agrees to a different handling of the claim or, in the event of a domestic support obligation, unless the debtor contributes all "disposable income" - detailed below - to a five-year plan, the plan must pay priority claims in full.
11 U.S.C. § 1322(a) (a).
If the debtor wishes to retain the collateral securing a specific claim, the plan must guarantee that the holder of the secured claim get at least the collateral's value. If the obligation underlying the secured claim (e.g., a vehicle loan) was used to purchase the collateral and the debt was incurred within specific time periods prior to the bankruptcy filing, the plan must provide for full payment of the debt, not simply the value of the collateral (which may be less due to depreciation). Payments to certain secured creditors (for example, the house mortgage lender) may be made in excess of the initial loan repayment schedule (which may be longer than the plan), as long as any arrearage is made up within the plan. To assess the right handling of secured claims in the plan, the debtor should contact with an attorney.
The plan does not have to pay unsecured claims in full as long as it states that the debtor will pay all projected "disposable income" over a "applicable commitment period" and that unsecured creditors receive at least as much as they would if the debtor's assets were liquidated under chapter 7. 11 U.S.C. § 1325. In Chapter 13, "disposable income" is defined as income (other than child support payments received by the debtor) less amounts reasonably necessary for the debtor's or dependents' maintenance or support and less charitable contributions up to 15% of the debtor's gross income. If the debtor owns a business, the definition of disposable income excludes amounts required for normal operating expenses. 11 United States Code 1325(b)(2)(A) and (B). The debtor's current monthly income determines the "applicable commitment period." If the current monthly income is less than the state median for a family of the same size, the appropriate commitment time is three years; if the current monthly income is larger than the state median for a family of the same size, the applicable commitment period is five years. 11 U.S.C. § 1325(d) (d). Only if unsecured debt is paid in full over a shorter time may the plan be shorter than the required commitment period (three or five years).
Even if the plan has not yet been accepted by the court, the debtor must begin paying plan payments to the trustee within 30 days after filing the bankruptcy case. 11 U.S.C. § 1326(a)(1) (1). If any secured loan or lease payments become due before the debtor's plan is confirmed (typically home and automobile payments), the debtor must make adequate protection payments directly to the secured lender or lessor, deducting the amount paid from the amount paid to the trustee. Id.
The bankruptcy court must schedule a confirmation hearing no later than 45 days after the creditors' conference to determine whether the plan is practicable and fulfills the Bankruptcy Code's confirmation criteria. 11 U.S.C. §§ 1324, 1325. Creditors will be notified of the hearing 28 days in advance and may object to confirmation. 2002, Fed. R. Bankr. P. (b). The most common complaints are that the payments promised under the plan are less than what creditors would get if the debtor's assets were liquidated or that the debtor's plan does not commit all of the debtor's estimated disposable income for the three or five year statutory commitment term.
If the plan is approved by the court, the chapter 13 trustee will distribute monies "as soon as practical." 11 U.S.C. § 1326(a)(2) (2). If the court rejects the plan, the debtor may file a revised plan. 11 U.S.C. § 1323. The debtor may also change the case to a chapter 7 liquidation proceeding. (4) 11 U.S.C. § 1307(a) (a). If the court fails to affirm the plan or the modified plan and instead dismisses the case, the trustee may keep some monies for fees, but the trustee must release any remaining assets to the debtor (other than funds already disbursed or due to creditors). 11 U.S.C. § 1326(a)(2) (2).
A change in circumstances may occasionally jeopardize the debtor's capacity to make plan installments. A creditor, for example, may object to or threaten to object to a plan, or the debtor may have accidentally neglected to disclose all creditors. In such cases, the plan might be changed before or after confirmation. 11 U.S.C. §§ 1323, 1329. Modification after confirmation is not restricted to the debtor's initiative, but may also be requested by the trustee or an unsecured creditor. 11 U.S.C. § 1329(a) (a).
Making the Strategy Work
The terms of an approved plan bind both the debtor and each creditor. 11 U.S.C. § 1327. Once the court has approved the plan, the debtor must carry it out. The debtor must make monthly payments to the trustee, either directly or by payroll deduction, which will need a period of adjustment to living on a set budget. Furthermore, while confirmation of the plan allows the debtor to keep property as long as payments are made, the debtor may not acquire new debt without first meeting with the trustee, as extra debt may jeopardize the debtor's ability to finish the plan. 11 U.S.C. §§ 1305(c), 1322(a)(1), 1327.
Payroll deductions may be used by a debtor to make plan payments. This strategy enhances the possibility of payments being completed on time and the debtor completing the plan. In any case, if the debtor fails to make the payments required under the confirmed plan, the court has the option of dismissing the case or converting it to a liquidation case under Chapter 7 of the Bankruptcy Code. 11 U.S.C. § 1307(c) (c). If the debtor fails to pay any post-filing domestic support obligations (i.e., child support, alimony) or fails to make appropriate tax filings throughout the case, the court may dismiss or convert the case. 11 USC 1307(c) and (e), 1308, and 521.
The Discharge Under Chapter 13
The bankruptcy law governing the scope of the chapter 13 discharge is complicated and has recently changed significantly. As a result, debtors should seek competent legal counsel regarding the scope of the chapter 13 discharge prior to filing.
A chapter 13 debtor is entitled to a discharge upon completion of all payments under the chapter 13 plan if he or she: (1) certifies (if applicable) that all domestic support obligations that became 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 of action. 11 U.S.C. § 1328. However, the discharge will not be granted until the court determines, after notice and a hearing, that there is no reason to believe there is any pending proceeding that could result in a limitation on the debtor's homestead exemption. 11 U.S.C. § 1328(h) (h).
With few exceptions, the discharge discharges the debtor from all debts covered by the plan or disallowed (under Section 502). Creditors covered by the chapter 13 plan in full or in part may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.
With the exception of certain debts referenced in 11 U.S.C. 1328, the discharge generally releases the debtor from all debts provided for by the plan or disallowed. Certain long-term obligations (such as a home mortgage), alimony or child support debts, 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 are not discharged in chapter 13. If they are not fully paid under the chapter 13 plan, the debtor will still be liable for them once the bankruptcy case is completed. Debts for money or property obtained under 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 the debtor's willful or malicious actions causing 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. Fed. R. Bankr. P. 4007; 11 U.S.C. 1328, 523(c) (c).
In a chapter 13 case, the discharge is broader than in a chapter 7 case. Debts dischargeable in a chapter 13 but not in a chapter 7 include those incurred to pay nondischargeable tax obligations, as well as those arising from property settlements in divorce or separation proceedings. 11 U.S.C. § 1328(a) (a).
The Hardship Discharge under Chapter 13
After a plan is confirmed, circumstances may arise that prevent the debtor from carrying it out. In such cases, the debtor may petition the court for a "hardship discharge." 11 U.S.C. § 1328(b) (b). In general, such a discharge is available only if all of the following conditions are met: (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. A hardship discharge may be granted if an injury or illness prevents you from working long enough to fund even a modified plan. The hardship discharge is more limited than the discharge described above, and it does not apply to any nondischargeable debts in a chapter 7 case. 11 U.S.C. § 523.
Notes
The debtor's "current monthly income" is defined in the Bankruptcy Code as the average monthly income received over the six calendar months preceding the commencement of the bankruptcy case, including regular contributions to household expenses from nondebtors and income from the debtor's spouse if the petition is a joint petition, but not including social security income or certain payments made because the debtor is the victim of certain crimes. 11 U.S.C. § 101(10A) (10A).
In North Carolina and Alabama, bankruptcy administrators perform functions similar to those performed by US trustees in the remaining forty-eight states. The Administrative Office of the United States Courts oversees the bankruptcy administrator program, while the Department of Justice oversees the U.S. trustee program. References to U.S. trustees are equally applicable to bankruptcy administrators for the purposes of this book.
Section 507 specifies ten types of unsecured claims to which Congress has granted priority distribution for public policy considerations above other unsecured claims.
A cost of $25 is assessed for changing a chapter 13 case to a chapter 7 case.