Chapter 13 Bankruptcy – The Basics
By Douglas A. Crowder
Editor’s Note: The following article is taken largely from the U.S. Government publication, Bankruptcy Basics, available at http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter13.aspx. No copyright protection is claimed in portions of this article taken from that publication. Copyright protection is claimed for the self-assessment questions following the article.
The purpose of this article is to introduce the basic concepts and procedures regarding a Chapter 13.
Also called a wage earner’s plan, a Chapter 13 enables individuals with regular income to repay all or a portion of their debts over a period of 3 to 5 years. If the debtor’s current monthly income is less than the applicable state median, the plan must be for at least three years but can be up to five years. If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. [11 U.S.C. §1322(d)]
ADVANTAGES OF CHAPTER 13
Chapter 13 offers individuals a number of advantages over a chapter 7. Most significantly, it offers an opportunity to save 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.
Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers.
CHAPTER 13 ELIGIBILITY
Under 11 U.S.C. Sec. 109(e), in order to qualify for a Chapter 13, your secured debt (liens on real estate, car loans, or any other debts that are secured by some type of property) must be less than $750,000 and your unsecured debts less than $250,000. These amounts are adjusted periodically to reflect changes in the consumer price index. At the time of this writing, the secured debt limit is $1,081,400, and the unsecured debts limit is $360,475.
FILING THE CHAPTER 13
The Chapter 13 initial filing paperwork includes most of the same documents that are required in a Chapter 7: the petition itself, schedules of assets and liabilities; a schedule of current income and expenditures; a schedule of executory contracts and unexpired leases; and a statement of financial affairs. [Fed. R. Bankr. P. 1007(b)]
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 60 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. [11 U.S.C. § 521]
The debtor must provide the chapter 13 case 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). [11 U.S.C. § 521]
A husband and wife may file a joint petition or individual petitions. [11 U.S.C. § 302(a)]
INFORMATION NEEDED TO FILE CHAPTER 13
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.
Married individuals must gather this information for their spouse regardless of whether they are filing a joint petition, separate individual petitions, or even if only one spouse is filing. In a situation where only one spouse files, the income and expenses of the non-filing spouse is required so that the court, the trustee and creditors can evaluate the household’s financial position.
THE CHAPTER 13 TRUSTEE
When an individual files a chapter 13 petition, a trustee is appointed to administer the case, who both evaluates the case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors. [11 U.S.C. § 1302]
THE AUTOMATIC STAY
Filing the petition under chapter 13 “automatically stays” (stops) most collection actions against the debtor or the debtor’s property. [11 U.S.C. § 362] Filing the petition does not, however, stay certain types of actions, such as family law actions (except to the extent that such proceeding seeks to determine the division of property), various governmental police actions, and tax audits. The stay may be effective only for a short time in some situations. [See 11 U.S.C. § 362(b) for exceptions and limitations to the stay]
The stay arises by operation of law and requires no judicial action. 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.
Chapter 13 also contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a “consumer debt” from any individual who is liable along with the debtor. [11 U.S.C. § 1301(a)] Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose. [11 U.S.C. § 101(8)]
STOPPING FORECLOSURE PROCEEDINGS
Individuals may use a chapter 13 proceeding to save their home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as the individual files the chapter 13 petition. The individual may then bring the past-due payments current over a reasonable period of time. Nevertheless, the debtor may still lose the home if the mortgage company completes the foreclosure sale under state law before the debtor files the petition. [11 U.S.C. § 1322(c)] The debtor may also lose the home if debtor fails to make the regular mortgage payments that come due after the chapter 13 filing.
MEETING OF CREDITORS
No more than 60 days after the debtor files the chapter 13 petition, the chapter 13 trustee will hold a meeting of creditors. [Fed. R. Bankr. P. 2003(a)]. 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. [11 U.S.C. § 343] If a husband and wife file a joint petition, they both must attend the creditors’ meeting and answer questions. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the creditors’ meeting. [11 U.S.C. § 341(c)] 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.
CLAIMS BY CREDITORS
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. [Fed. R. Bankr. P. 3002(c)] A governmental unit, however, has 180 days from the date the case is filed file a proof of claim. [11 U.S.C. § 502(b)(9)]
THE CHAPTER 13 PLAN
Unless the court grants an extension, the debtor must file a repayment plan with the petition or within 14 days after the petition is filed. [Fed. R. Bankr. P. 3015] 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 (and usually does) offer creditors less than full payment on their claims. There are three types of claims: priority, secured, and unsecured, which are dealt with differently under the plan.
Priority claims are those granted special status by the bankruptcy law, such as most taxes and the costs of bankruptcy proceeding. 11 U.S.C. Sec. 507 sets forth 10 categories of priority claims. The most common are domestic support obligations, administrative expenses (costs incurred during the bankruptcy proceeding, such as trustee fees and attorney fees) and most taxes. (The article on Chapter 7 contains a discussion of which taxes are dischargeable (non-priority). Briefly. if a personal income tax is more than 3 years old, and the tax return has been filed more than 2 years before the bankruptcy filing, it may be non-priority or dischargeable. If a tax is dischargeable under a Chapter 7, it can be partially discharged under a Chapter 13. If not, it must be paid in full during the Chapter 13 plan.
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” to a five-year plan. [11 U.S.C. § 1322(a)]
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.
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.
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 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. [11 U.S.C. § 1325] In chapter 13, “disposable income” is income (other than child support payments received by the debtor) less amounts reasonably necessary for the maintenance or support of the debtor or dependents and less charitable contributions up to 15% of the debtor’s gross income. If the debtor operates a business, the definition of disposable income excludes those amounts which are necessary for ordinary operating expenses. [11 U.S.C. § 1325(b)(2)(A) and (B)]
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. [11 U.S.C. § 1325(d)] 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.
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. [11 U.S.C. § 1326(a)(1)]
SECURED AND LEASE PAYMENTS.
If any secured loan payments or lease payments come 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 that would otherwise be paid to the trustee. [11 U.S.C. § 1326(a)(1)]
No later than 45 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. [11 U.S.C. §§ 1324, 1325] Creditors will receive 28 days’ notice of the hearing and may object to confirmation. [Fed. R. Bankr. P. 2002(b)] While a variety of objections may be made, the most frequent ones are that payments offered under the plan are less than creditors would receive if the debtor’s assets were liquidated or that the debtor’s plan does not commit all of the debtor’s projected disposable income for the three or five year applicable commitment period.
If the court confirms the plan, the chapter 13 trustee will distribute funds received under the plan “as soon as is practicable.” [11 U.S.C. § 1326(a)(2)] If the court declines to confirm the plan, the debtor may file a modified plan. 11 U.S.C. § 1323. The debtor may also convert the case to a liquidation case under chapter 7. [11 U.S.C. § 1307(a)] 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). [11 U.S.C. § 1326(a)(2)]
POST PETITION MODIFICATIONS OF 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. [11 U.S.C. §§ 1323, 1329]
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. [11 U.S.C. § 1329(a)]
MAKING THE PLAN WORK
The provisions of a confirmed plan bind the debtor and each creditor. [11 U.S.C. § 1327] Once the court confirms the plan, it is the debtor’s obligation to make the plan succeed, by making the plan payments. Generally, the debtor may not incur new debt without consulting the trustee, because additional debt may compromise the debtor’s ability to complete the plan. [11 U.S.C. §§ 1305(c), 1322(a)(1), 1327]
In any event, if the debtor fails to make the payments due under the confirmed plan, the court may dismiss the case or convert it to a liquidation case under chapter 7 of the Bankruptcy Code. [11 U.S.C. § 1307(c)] 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. [11 U.S.C. §§ 1307(c) and (e), 1308, 521]
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. [11 U.S.C. § 1328]
The discharge releases the debtor from all debts provided for by the plan or disallowed (under section 502), 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 referenced in 11 U.S.C. § 1328. 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. [11 U.S.C. §§ 1328, 523(c); Fed. R. Bankr. P. 4007(c)]
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. [11 U.S.C. § 1328(a)]
THE CHAPTER 13 HARDSHIP DISCHARGE
After confirmation of a plan, circumstances may arise that prevent the debtor from completing the plan. In such situations, the debtor may ask the court to grant a “hardship discharge.” [11 U.S.C. § 1328(b)] Generally, such a discharge is available only if: (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. Injury or illness that precludes employment sufficient to fund even a modified plan may serve as the basis for a hardship discharge. The hardship discharge is more limited than the discharge described above and does not apply to any debts that are nondischargeable in a chapter 7 case. [11 U.S.C. § 523]
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