Information On Chapter 13 Bankruptcy
Individual Debt Adjustment
Chapter 13 of the United States Bankruptcy Code is often referred to as a wage earner chapter, although it is available to individuals and married couples with regular income from any source, not just wages. Chapter 13 is designed for individuals with regular income who are currently unable to pay their debts but wish to do so. Chapter 13 deals with the financially distressed individual, who wants to pay back a portion if not all of his or her debts. As such, they are allowed to propose and carry out a repayment plan whereby creditors are paid over an extended period of time. The repayment plan is carried out under court supervision and protection. Debtors are permitted to repay creditors in monthly installments over a three (3) to five (5) year period. During the repayment period creditors are prohibited from starting or continuing collection efforts. In no case may a plan provide for payments over a five (5) year period and a plan providing for payments over more than three years must be for cause and approved by the court. 11 U.S.C. § 1322(d).
Chapter 13 relief is available to any individual, even if self-employed or operating an unincorporated business, as long as the individual’s unsecured debts are less than $383,175 and secured debts are less than $1,149,525 . 11 U.S.C. § 109(e). Corporations, limited liability companies, and partnerships are not able to file Chapter 13. 11 U.S.C. § 109(e). An individual cannot file under Chapter 13 or any other chapter if, during the preceding 180 days, 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 creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. § 109(g), 362 (d), and (e).
How Chapter 13 Works
A Chapter 13 case begins with the filing of a petition with the bankruptcy court serving the area where the debtor resides. Unless the court orders otherwise, the debtor shall also file with the court:
- schedules of assets and debts,
- a schedule of current monthly income and expenses,
- a schedule of executory contracts and unexpired leases, and
- a statement of financial affairs. Bankruptcy Rule 1007(b).
A husband and wife may file a joint petition or separate individual petitions. 11 U.S.C. § 302(a).
The courts are currently required to charge a filing fee. Upon filing the petition the fee should be paid in full to the clerk of the court or paid in installments with the court’s permission. 28 U.S.C. § 1930(a); Bankruptcy Rule 1006(b); Bankruptcy Court Miscellaneous Fee Schedule, Item 8. The final installment must be paid no later than 120 days after filing the petition. The time of any installment may be extended by the court for cause shown so long as the last installment is paid not later than 180 days after the filing of the petition. Bankruptcy Rule 1006(b). In the case of a married couple only one (1) filing fee is charged. In some cases, the Court may waive the filing fee if the debtor can show an inability to pay.
In order to complete the petition, statement of financial affairs and schedules, the debtor will need to compile the following information:
- a list of all creditors, including account numbers, mailing addresses, amounts owed and type of debt (i.e. credit card, medical bill, pay day loan, etc.);
- copies of the debtor’s pay stubs for the past six months or for those self-employed individuals, a 6-month income and expense statement for the business;
- a list of all of the debtor’s property; and
- a detailed list of the debtor’s monthly living expenses (food, clothing, shelter, utilities, taxes, transportation, medicine…)
When a husband and wife file a joint petition or each spouse files an individual petition, the above detailed data must be gathered for both spouses. In order to accurately assess the financial responsibilities of the household when only one spouse files, the income and expenses of the non-filing spouse typically must be included in the debtor’s schedules and statement of financial affairs. In addition, for individuals with primarily consumer debt, each debtor will be required to attend and complete a credit counseling course prior to filing for Chapter 13 protection. 11 U.S.C. § 521(b).
An impartial trustee is appointed to administer the case upon the filing of the petition. 11 U.S.C. § 1302. A primary role of the Chapter 13 trustee is to collect payments from debtors and make distributions to creditors. 11 U.S.C. § 1302.
The filing of the petition under Chapter 13 automatically stays most collection actions against the debtor or the debtor’s property. 11 U.S.C. § 362. In other words, creditors are prevented from initiating or continuing any lawsuits, wage garnishments, or even telephone calls demanding payments as long as the stay is in effect. The bankruptcy court system will notify creditors of the filing of the petition. Chapter 13 contains a special automatic stay provision that will not allow a creditor to seek payment on a consumer debt from any individual who is liable with the debtor. 11 U.S.C. § 1301. Consumer debts are those incurred for consumer as opposed to business needs.
Through operation of the automatic stay, an individual debtor can prevent an immediate foreclosure on his or her principal residence through filing a Chapter 13 petition. Chapter 13 then allows the debtor the right to cure defaults on long-term home mortgages by bringing the balance current over a reasonable period of time. Under state law, the debtor can stop a foreclosure sale and propose a plan to cure a default with respect to a lien on the debtor’s principal residence up until the completion of the foreclosure sale. 11 U.S.C. § 1322(c).
A plan of repayment must be filed within 15 days of the bankruptcy petition, unless the time is extended by the court for cause. Bankruptcy Rule 3015. The Chapter 13 plan MUST provide for the full payment of all claims entitled to priority under § 507, unless the holder of a particular claim agrees to a different treatment of the claim. Priority claims are typically alimony, child support, and taxes. If the plan classifies claims, it MUST provide the same treatment for each claim within each class and provide for the submission of such portion of the debtor’s future income to the supervision of the trustee as is necessary for execution of the plan. 11 U.S.C. § 1322. The Plan is approved by the court and then funds are distributed to the creditors by the trustee according to the terms of the plan, which may offer creditors less than full payment on their claims. The trustee or creditor may object to confirmation of the plan for cause as defined under the Bankruptcy Code. Normally, the debtor is required to pay his or her disposable income as the monthly plan payment. Disposable income is income that is not reasonably necessary for the maintenance or support of the debtor or dependents. In the case of a business, disposable income is defined as excluding amounts necessary for the payment of ordinary operating expenses. 11 U.S.C. § 1325 (b)(2)(A) and (B).
The determination as to whether a plan is three (3) or five (5) years is based upon the debtor’s annual income as calculated by the earnings received by the debtor in the six-month period immediately preceding the bankruptcy filing and the number of dependents residing with the debtor. 11 U.S.C. § 1325 (b)(4). Furthermore, the amount of funds the debtor is required to pay back to his unsecured creditors (i.e. credit cards, medical bills, pay day loans, etc) is determined by an analysis that is substantially similar to the Chapter 7 means test. 11 U.S.C. § 1325 (b)(1).
A meeting of creditors is held in each case, at which the debtor is examined under oath. Usually, this meeting is held thirty (30) to forty-five (45) days after the filing of the petition. The debtor must attend this meeting where creditors may appear and ask questions regarding the financial affairs and the proposed terms of the plan. 11 U.S.C. § 343. If a husband and wife have filed a joint petition, both must attend the creditor’s meeting. The trustee will conduct the meeting and will question the debtor on the same matters. If there are problems with the plan, they are typically resolved during or shortly after the creditors meeting. Problems may be avoided by having a complete and accurate plan and petition and through consulting the trustee prior to the meeting.
Unsecured creditors who have claims against the debtor must file their claims with the court within 90 days of the first date set for the meeting of creditors. Bankruptcy Rule 3002(c). Government units, may file a proof of claim up until 180 days from the date the case is filed. 11 U.S.C. § 502(b)(9) and Bankruptcy Rule 3002(c)(1).
After the meeting of creditors, a confirmation hearing is held at which time the bankruptcy judge must determine whether the plan is feasible and meets the standards for confirmation set forth in the Bankruptcy Code. 11 U.S.C. §§ 1324 and 1325. Creditors and the trustee may object to the confirmation. A variety of objections are available. The most frequent objections are that the debtor’s plan does not commit all of the debtor’s projected disposable income for the length of the plan or that payments offered under the plan are less than creditors would receive if the debtor’s assets were liquidated.
Within thirty (30) days after the filing of the plan the debtor must start making payments to the trustee, even if the plan has not yet been approved by the court. 11 U.S.C. § 1326(a)(1). If the plan is confirmed by the bankruptcy judge, the Chapter 13 trustee commences distribution of the funds received in accordance with the plan as soon as practicable. 11 U.S.C. § 1326(a)(2). If the plan is not confirmed, the debtor has a right to file a modified plan. 11 U.S.C. ‘ 1323. The debtor also has a right to dismiss the case or convert the case to a liquidation case under Chapter 7. 11 U.S.C. § 1307. If the plan or modified plan is not confirmed and the case is dismissed, the court may authorize the trustee to retain a specified amount for costs, but all other funds paid to the trustee are typically returned to the debtor. 11 U.S.C. § 1362(a)(2).
The plan may be modified either before or after confirmation if the debtor inadvertently failed to list all creditors, a creditor objects or threatens to object to the plan, or the debtor’s ability to make plan payments is affected by changed circumstances. 11 U.S.C. §§ 1323 and 1329. Modification after confirmation may be at the request of the debtor, the trustee or an unsecured creditor. 11 U.S.C. § 1329(a).
Making The Plan Work
The provisions of a confirmed plan are binding on the debtor and each creditor. 11 U.S.C. § 1327. Responsibility lies with the debtor to ensure that the plan will succeed once the court has confirmed the plan. Regular payments to the trustee must be made by the debtor. This requires the debtor to live on a fixed budget for a prolonged period of time. Payments can be withheld from the debtor’s paycheck by the employer and then transmitted to the Chapter 13 trustee. Experience has shown that this practice increases the likelihood that payments will be made on time and that the plan will be completed. In any event, failure to make the payments in accordance with the confirmed plan may result in dismissal of the case. 11 U.S.C. § 1307(c). Furthermore, while confirmation of the plan entitles the debtor to retain property as long as payments are made, the debtor may not incur any significant new credit obligations without consulting the trustee. Such credit obligations may have an impact upon the execution of the plan. 11 U.S.C. § 1305(c), 1322(a)(1) and 1327. However, new long-term debt may be incurred upon receiving court permission.
The Chapter 13 Discharge
Bankruptcy law regarding the scope of the Chapter 13 discharge is complex. Debtors should consult competent legal counsel prior to filing regarding the scope of the Chapter 13 discharge.
The Chapter 13 debtor is entitled to a discharge upon successful completion of all payments under the Chapter 13 plan. 11 U.S.C. § 1328(a). The discharge has the effect of releasing the debtor from all debts provided by the plan or disallowed under § 502, with limited exceptions. Creditors
who received payment under the Chapter 13 plan, whether it be in full or in part, may no longer initiate or continue any legal action or other action against the debtor to collect the discharged obligations.
A broader discharge is available under Chapter 13 than in a Chapter 7 case. This is because under a Chapter 13 plan the debtor is required to live under the discipline of a three (3) to five (5) year repayment plan. As a general rule, the debtor is discharged from all debts provided for by the plan or disallowed, except certain long term obligations, or those debts which are, by their nature, nondischargeable.
The Chapter 13 Hardship Discharge
After confirmation of a plan, there are limited circumstances under which the debtor may request the court to grant a hardship discharge even though the debtor has failed to complete plan payments. 11 U.S.C. § 1328(b). Generally, such a discharge is available only to a debtor whose failure to complete plan payments is due to circumstances beyond the debtor’s control and through no fault of the debtor, provided creditors have received at least as much as they would have received in a Chapter 7 liquidation case and modification of the plan is not possible. Injury or illness that precludes employment sufficient to fund even a modified plan may serve as a basis for a hardship discharge. The Chapter 13 hardship discharge is similar to the Chapter 7 discharge and as such does not apply to any debts that are nondischargeable in a Chapter 7 case. 11 U.S.C. § 523.
Attorneys Fees And Costs
Most bankruptcy firms will charge a flat fee to assist a debtor in filing a Chapter 13 bankruptcy. However, Goldsmith & Guymon, P.C., charges based upon our hourly rates, plus costs incurred, and requires a minimum payment up front and the balance through the plan. The details of payment will be further set forth in our retainer letter. If you have any questions, please feel free to contact us at 877-262-1466. Thank you.
WE WANT TO REITERATE THAT THE ABOVE LETTER IS BY NO MEANS A COMPREHENSIVE ANALYSIS OF THE BANKRUPTCY CODE, NOR IS IT DESIGNED TO REPLACE THE SERVICES OF ADEQUATE LEGAL COUNSEL. THE ABOVE LETTER IS MERELY A ROUGH GUIDELINE AS TO HOW THE BANKRUPTCY PROCESS WORKS. PLEASE CONTACT US WITH ANY QUESTIONS YOU MIGHT HAVE REGARDING FILING A CHAPTER 13 BANKRUPTCY