Chapter 13 - Background

A Chapter 13 bankruptcy is also known as a “wage earner's plan” as it empowers individuals with reliable income to outline a plan to repay all or a portion of their debts. Under this chapter of the bankruptcy code, debtors propose a repayment plan to repay creditors over a period of three or five years in monthly payments. If the debtor's current monthly gross income is below the applicable state median, the plan will be recommended for three years unless the court approves the longer period of five years. So long as the chapter 13 plan is active the law prohibits creditors from beginning or continuing collection efforts.

Chapter 13 - Eligibility

Any individual, even if they are self-employed or operating an unincorporated business is eligible for chapter 13 relief so long as the individual's unsecured debts total less than $360,475 and secured debts are below $1,081,400. Corporations and partnerships do not qualify for bankruptcy protection under chapter 13 of the bankruptcy code.

An individual is not eligible to file for bankruptcy protection under any chapter if during the preceding 180 days, a prior bankruptcy petition was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens or was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court.

Chapter 13 - How It Works

A chapter 13 case is initiated when the debtor files a petition, accompanied by the required statements, schedules, and certificates, in the regional bankruptcy court for the area in which the debtor resides The courts charge a case filing fee which is paid to the clerk of the court upon filing. Once the case is filed, the debtor should expect to be asked to provide the chapter 13 trustee with a copy of the tax return or transcript for the most recent tax year as well as any tax returns filed during the life of the case (including tax returns for prior years that had not been filed when the case began).

When a chapter 13 petition is filed, an impartial trustee is appointed to administer the case. It is the responsibility of the chapter 13 trustee to both evaluate the case and serve as the disbursing agent. They will collect the payments from the debtor, then make distributions to creditors based on the plan. The act of filing the petition under chapter 13 automatically “stays" or stops most collection activities against the debtor or their property. So long as the stay remains in effect, creditors are prohibited from initiating or continuing debt collection actions such as lawsuits, garnishments or demanding payment by phone or mail. At the time of filing the clerk of the bankruptcy court gives notice of the bankruptcy case to all creditors whose names and addresses have been provided by the debtor.

A chapter 13 proceeding may be used by an individual to save their home from foreclosure. As soon as the individual files the chapter 13 petition, the automatic stay halts the foreclosure proceeding. Nevertheless, the debtor may still lose the home if the mortgage company completes the foreclosure sale under state law before the debtor files the chapter 13 petition. Under the guidance of the chapter 13 plan, an individual may then proceed to bring the past-due payments current over the life of the plan. However, debtor may still lose the home if he or she fails to make the regular mortgage payments that are due after the chapter 13 case has been filed.

The chapter 13 trustee will convene a meeting of creditors approximately 20 to 30 days after the filing of the chapter 13 petition. At this hearing, with the debtor under oath, the trustee and any creditors in attendance may ask questions of the debtor. Attendance at the meeting of creditors is mandatory for every debtor. The debtor must answer truthfully any questions posed regarding the debtor's financial affairs, assets and the proposed terms of the chapter 13 plan. If a married couple files a joint petition, both must attend the creditors' meeting and be prepared to answer any questions posed. In the interest of preserving their independent judgment, bankruptcy judges are prohibited from attending the creditors' meeting. The most reliable way for the debtor to avoid the discovery of problems at the creditors’ meeting is by ensuring that the petition and plan are complete and accurate, and by consulting with their attorney prior to the meeting.

Chapter 13 - Making the Plan Work

Once the plan is confirmed by the court, it is largely in the hands of the debtor to make the plan succeed. The primary action necessary on the part of the debtor to ensure the success of the proposed plan is to make timely and regular payments to the trustee as outlined in the plan. While confirmation of the plan entitles the debtor to retain this property so long as the required payments are made, the debtor is barred from incurring any new debt without the consent of the trustee. This constraint is in place so that additional debt does not compromise the debtor's ability to fulfill the obligations of the plan. Should the debtor fail to make the payments due under their confirmed plan, the court is likely to dismiss the case. If the debtor finds that they can no longer meet the obligations of the plan they may convert their case to a chapter 7 bankruptcy. Please see the chapter 7 description for an outline of the benefits available under that chapter of the bankruptcy code.

Chapter 13 - The Discharge

It is advised that debtors consult knowledgeable legal counsel prior to filing to be sure they understand the scope of the discharge available to them under chapter 13 of the bankruptcy code.

A chapter 13 debtor is entitled to a discharge of debts upon completion of all required payments under the chapter 13 plan as long as the debtor also meets the following criteria: (1) 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); ; (2) has completed an approved course in financial management and (3)certifies (if applicable) that all domestic support obligations that came due prior to making such certification have been paid . The court will not enter the discharge, 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.

With limited exceptions, the discharge of debts releases the debtor from all debts provided for by the plan or disallowed (under section 502). Creditors provided for in full or in part under the chapter 13 plan are prohibited from initiating or continuing any legal or other action against the debtor to collect any discharged obligations.

As a general guideline, the discharge releases the debtor from all debts provided for by the plan or disallowed, with the exception of certain types of debt. Debts not eligible for discharge under chapter 13 include debts for alimony or child support, certain long term obligations (such as a home mortgage), certain taxes, debts for most government funded or guaranteed educational loans or benefit overpayments, debts for restitution or a criminal fine included in a sentence on the debtor's conviction of a crime, and debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs. 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 scope of a discharge in a chapter 13 case is rather broader than that in a chapter 7 case. Debts dischargeable in a chapter 13, but not in chapter 7, include debts incurred to pay nondischargeable tax obligations, debts for willful and malicious injury to property (as opposed to a person), , and debts arising from property settlements in divorce or separation proceedings.