This chapter of the Bankruptcy Code provides for "adjustment" of debts of an individual with regular income. Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.
A chapter 13 bankruptcy is also called a wage earner's plan, although a debtor need not have a job to file chapter 13. It enables individuals with regular and stable income - from ANY source - to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. While the plan is in effect, the law forbids creditors from starting or continuing collection efforts.
Chapter 13 offers individuals a number of advantages over liquidation under chapter 7. Perhaps most significantly, chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the chapter 13 plan, on time. Another advantage of chapter 13 is that it allows individuals to modify secured debts (other than a mortgage for their primary residence, generally) and extend them over the life of the chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties (like your spouse or a friend) who are liable with the debtor on "consumer debts." This provision may protect co-signers. Finally, chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 protection.
Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual's unsecured debts are less than $307,675 and secured debts are less than $922,975. These amounts are adjusted every three years to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor.
In preparing for filing, you must provide information concerning your income and expenses for the six months prior to the filing date, and you must be sure that your tax returns are filed. We will also need information on all of your property and your debts. You must also have a credit counseling session with a licensed counselor; if you don't have the session, you can NOT file a bankruptcy case.
How Chapter 13 Works
Using the information you provide us, we prepare a series of documents totaling about 30 pages or so, including the plan. The court charges a fee of $274. Under certain circumstances, the court's fee can be paid in installments, but can NOT be waived. Once we file the petition, a meeting is scheduled with the bankruptcy trustee (called a "341 meeting" or "first meeting of creditors") which you MUST attend. We'll go with you, of course! We are with you every step of the way.
Filing the petition under chapter 13 "automatically stays" (stops) most collection actions against the debtor or the debtor's property. Filing the petition does not, however, stay certain types of actions, and the stay may be effective only for a short time in some situations. The stay arises by operation of law and requires no action by a judge. As long as the stay is in effect, creditors generally may not initiate or continue lawsuits, wage garnishments, or even make telephone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are provided by the debtor.
In a chapter 13 case, to participate in distributions from the bankruptcy estate, unsecured creditors must file their claims with the court within 90 days after the first date set for the meeting of creditors.
If there are no objections to the plan, the bankruptcy judge "confirms" the plan, and the trustee then distributes the funds to creditors according to the terms of the plan, which may offer some creditors less than full payment on their claims. The plan need not pay unsecured claims in full as long it provides that the debtor will pay all projected "disposable income" over an "applicable commitment period," and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor's assets were liquidated under chapter 7.
Within 30 days after filing the bankruptcy case, even if the plan has not yet been approved by the court, the debtor must start making plan payments to the trustee. If the court confirms the plan, the chapter 13 trustee will distribute funds received under the plan "as soon as is practicable." If the judge refuses to confirm the plan, the debtor may file a modified plan.
Occasionally, a change in circumstances may compromise the debtor's ability to make plan payments. For example, a creditor may object or threaten to object to a plan, or the debtor may inadvertently have failed to list all creditors. In such instances, the plan may be modified either before or after confirmation. Modification after confirmation is not limited to an initiative by the debtor, but may be at the request of the trustee or an unsecured creditor.
Making the Plan Work - It's up to YOU!
The provisions of a confirmed plan bind the debtor and each creditor. Once the court confirms the plan, the debtor must make the plan succeed. The debtor must make regular payments to the trustee, which will require adjustment to living on a fixed budget for a prolonged period. Furthermore, while confirmation of the plan entitles the debtor to retain property as long as payments are made, the debtor may not incur new debt without the judge's permission, because additional debt may compromise the debtor's ability to complete the plan.
Under some circumstances, a case can be dismissed. This may happen if you get behind on your payments to the trustee, you don't file your tax returns, or if you otherwise fail to follow the rules. In most cases, we will be there for the full term of your plan to help you if something goes wrong.
The Chapter 13 Discharge - The "Home Run"!
When you've made all the payments required by the plan, the chapter 13 trustee will notify the court and the judge will issue an Order of Discharge, relieving you of the obligation to pay most of your debt. The discharge releases the debtor from all debts provided for by the plan or disallowed, with limited exceptions. Creditors provided for in full or in part under the chapter 13 plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.
As a general rule, the discharge releases the debtor from all debts provided for by the plan or disallowed, with the exception of certain debts. Debts not discharged in chapter 13 include certain long term obligations (such as a home mortgage), debts for alimony or child support, 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. 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 non- dischargeable.
The discharge in a chapter 13 case is somewhat broader than in a chapter 7 case. Debts dischargeable in a chapter 13, but not in chapter 7, include debts for willful and malicious injury to property (as opposed to a person), debts incurred to pay nondischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings.
A chapter 13 case may be converted to chapter 7 if circumstances change during the case.
Chapter 13 DISCHARGE (when the plan is done, and the case is over)
Once the judge issues the Order of Discharge, most creditors are prohibited from contacting you or trying to collect a debt that was listed in the bankruptcy plan; the discharge does NOT prevent collection of new debts. Occasionally, a creditor will illegally attempt to collect an old debt. If so, you should contact your attorney for assistance. Because we are usually with you for the full term of your plan, feel free to call us any time there is a problem.
Debts for child support, alimony, taxes, student loans and court orders for restitution are among the debts that usually are NOT discharged.
The discharge does NOT affect the bank's right to foreclose the mortgage, so you MUST remain current on the mortgage.
Chapter 13 can discharge a few MORE debts than chapter 7!
If you think a creditor is illegally trying to collect a debt from you, let us know and we will take all the appropriate steps to stop the creditor, including suing the creditor on your behalf.