Chapter 13 Bankruptcy
Individuals who do not qualify for eliminating their debts under Chapter 7 Bankruptcy, or who wish to restructure their debts into a reduced payment plan have the option of filing a Chapter 13 Bankruptcy. In a Chapter 13 Bankruptcy, the debtor, generally, will pay a portion of his or her debt over a thirty-six or sixty month period, typically at a reduced interest rate, free from additional penalties and fees. Like a Chapter 7 Bankruptcy, a Trustee is appointed to oversee the debtor’s case.Advantages Of A Chapter 13 Bankruptcy
Most debtors seek to have their debts discharged in Chapter 7 Bankruptcy, however in certain circumstances the Chapter 13 Bankruptcy is preferable. 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 reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the Chapter 13 plan. Doing this may lower the payments. Student loans, which are not dischargeable in a Chapter 7 Bankruptcy, may be included in a Chapter 13 plan. Finally, Chapter 13 acts like a consolidation loan under which the individual makes the plan payments to the Trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under Chapter 13 protection.How A Chapter 13 Bankruptcy Works
A Chapter 13 case begins by filing a petition with the Bankruptcy Court serving the area where the debtor has a domicile or residence. Unless the Court orders otherwise, the debtor must also file with the court: (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a schedule of executory contracts and unexpired leases; and (4) a statement of financial affairs. The debtor must also file a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; evidence of payment from employers, if any, received sixty days before 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. The debtor must provide the Chapter 13 Trustee with a copy of the tax return or transcripts for the most recent tax year as well as tax returns filed during the case (including tax returns for prior years that had not been filed when the case began).
In order to complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, the debtor must compile the following information:
- A list of all creditors and the amounts and nature of their claims;
- The source, amount, and frequency of the debtor's income;
- A list of all of the debtor's property; and
- A detailed list of the debtor's monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.
Filing the petition under Chapter 13 automatically stays most collection actions against the Debtor or the Debtor's property. 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.
Between twenty-one and fifty days after the debtor files the Chapter 13 petition, the Chapter 13 Trustee will hold a meeting of creditors. During this meeting, the Trustee places the debtor under oath, and both the Trustee and creditors may ask questions. The debtor must attend the meeting and answer questions regarding his or her financial affairs and the proposed terms of the plan. The parties typically resolve problems with the plan either during or shortly after the creditors' meeting. Generally, the debtor can avoid problems by making sure that the petition and plan are complete and accurate, and by consulting with the Trustee prior to the meeting. After the meeting of creditors, the debtor, the Chapter 13 Trustee, and those creditors who wish to attend will come to Court for a hearing on the debtor's Chapter 13 repayment plan.The Chapter 13 Plan And Confirmation Hearing
Unless the court grants an extension, the debtor must file a repayment plan with the petition or within fourteen days after the petition is filed. A plan must be submitted for Court approval and must provide for payments of fixed amounts to the Trustee on a regular basis, typically biweekly or monthly. The Trustee then distributes the funds to creditors according to the terms of the plan, which may offer creditors less than full payment on their claims.
There are three types of claims: priority, secured, and unsecured. Priority claims are those granted special status by the bankruptcy law, such as most taxes and the costs of bankruptcy proceeding. Secured claims are those for which the creditor has the right take back certain property (i.e., the collateral) if the debtor does not pay the underlying debt. In contrast to secured claims, unsecured claims are generally those for which the creditor has no special rights to collect against particular property owned by the debtor.
The plan must pay priority claims in full unless a particular priority creditor agrees to different treatment of the claim or, in the case of a domestic support obligation, unless the debtor contributes all "disposable income" - discussed below - to a five-year plan.
If the debtor wants to keep the collateral securing a particular claim, the plan must provide that the holder of the secured claim receive at least the value of the collateral. If the obligation underlying the secured claim was used to buy the collateral (e.g., a car loan), and the debt was incurred within certain time frames before the bankruptcy filing, the plan must provide for full payment of the debt, not just the value of the collateral (which may be less due to depreciation). Payments to certain secured creditors (i.e., the home mortgage lender), may be made over the original loan repayment schedule (which may be longer than the plan) so long as any arrearage is made up during the plan.
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. The applicable commitment period depends on the debtor's current monthly income. The applicable commitment period must be three years if current monthly income is less than the state median for a family of the same size - and five years if the current monthly income is greater than a family of the same size. The plan may be less than the applicable commitment period (three or five years) only if unsecured debt is paid in full over a shorter period.
No later than forty-five days after the meeting of creditors, the bankruptcy judge must hold a confirmation hearing and decide whether the plan is feasible and meets the standards for confirmation set forth in the Bankruptcy Code. If the Court confirms the plan, the Chapter 13 Trustee will distribute funds received under the plan. If the Court declines to confirm the plan, the Debtor may file a modified plan. The Debtor may also convert the case to a liquidation case under Chapter 7. If the court declines to confirm the plan or the modified plan and instead dismisses the case, the court may authorize the Trustee to keep some funds for costs, but the Trustee must return all remaining funds to the debtor (other than funds already disbursed or due to creditors).Making the Plan Work
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 either directly or through payroll deduction, 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 consulting the trustee, because additional debt may compromise the debtor's ability to complete the plan.
If the debtor fails to make the payments due under the confirmed plan, the Court may dismiss the case or convert it to a Chapter 7 Bankruptcy. The Court may also dismiss or convert the debtor's case if the debtor fails to pay any post-filing domestic support obligations (i.e., child support, alimony), or fails to make required tax filings during the case.The Chapter 13 Discharge
A Chapter 13 debtor is entitled to a discharge upon completion of all payments under the Chapter 13 plan so long as the debtor: (1) certifies (if applicable) that all domestic support obligations that came 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 in financial management. The court will not enter the discharge, however, 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.
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 nondischargeable.
Attorney Husain offers consultation in all of his offices for Chapter 13 Bankruptcy. Please call to arrange for an appointment.