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Chapter 13 Bankruptcy in Detail

Chapter 13 Overview

A Chapter 13 bankruptcy is available to consumers who do not meet the means test for a Chapter 7 filing because they make too much money or who have valuable assets they intend on keeping. The definition of valuable varies from person to person. A home with negative equity in pure economic terms is valueless. A car that is constantly depreciating in value is a liability when one takes maintenance into consideration. You must treat your decisions in pure economic terms to truly achieve your goal of perfect financial freedom. Chapter 13 filings also offer more flexibility for people who want to keep their homes or for those who have assets that they cannot protect with exemptions. For example, if you own several fully-restored classic cars, you risk losing them in a Chapter 7 filing. A Chapter 13 filing allows you to keep those assets. Chapter 13 allows consumers to keep all of their assets because a Chapter 13 bankruptcy allows consumers to propose a plan to repay creditors over time. This plan will generally last three to five years, depending on individual income. As a general guideline, individuals whose income is below the state median income generally have three-year plans unless the Bankruptcy Court finds “just cause” to extend the plan period.

Once the petition and plan are drafted and filed, a confirmation hearing takes place. At the confirmation hearing, the court either approves or disapproves the consumer's repayment plan, depending on whether it meets the Bankruptcy Code's requirements for confirmation. If a proof of claim has been filed, they may also be challenged during the confirmation process. In that event, confirming a Chapter 13 plan may require multiple hearings. Unlike Chapter 7, the Chapter 13 consumer remains in possession of his or her assets and makes payments through the trustee based on predicted income over the life of the plan. The trustee then distributes the plan payments to the creditors. If income goes down during the plan, the payments can be adjusted. Conversely, if an individual’s income increases substantially, the amount repaid can go up if you were paying less than 100% of the amount owed to your creditors. This only happens if a creditor or the trustee files a motion to increase the plan payments. You have to be notified of the motion and must be given an opportunity to object to it.

A Chapter 13 bankruptcy is not resolved in a matter of months like a Chapter 7 bankruptcy. Before a consumer can receive a discharge in a Chapter 13, he or she must make all of the payments in the plan. The consumer is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. More types debts are eliminated by the Chapter 13 discharge than the Chapter 7 discharge. For example, debts related to property or money obtained under false pretenses or fraud can be discharged in a Chapter 13 because they are being repaid.

What Are The Advantages of Filing A Chapter 13 Bankruptcy?

Chapter 13 offers individuals a number of advantages when compared to liquidation under Chapter 7. One major difference is that a Chapter 13 plan allows consumers to keep their homes, even if they are in foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. They must still make all mortgage payments that come due during the Chapter 13 plan on time, however. Homeowners also have another powerful tool at their disposal. A Chapter 13 bankruptcy allows consumers to strip unsecured mortgages. A mortgage is unsecured when its value is not supported by the value of the house.

Allen Adams, Lombard, Illinois: Secured vs. Unsecured Debt and Chapter 13 Lien Strips

For example, Allen owns a house with two mortgages in Lombard, Illinois. The house is worth $300,000, but his first and second mortgages total $450,000. The second mortgage is $125,000 and is completely unsecured by the property’s value. Allen can strip the second mortgage from his home and treat it as an unsecured debt, paying back a portion of the debt over the lifetime of his plan. As a result, Allen will have put himself in a position where he is only $25,000 underwater, as opposed to $150,000. During the course of his Chapter 13 plan, Allen will be paying down the balance on his first mortgage. Once he receives his discharge, his home may be approaching the break-even point on its equity.

Chapter 13 Eligibility

Even if you are self-employed, you are eligible for Chapter 13 relief as long as you are a human being (corporations cannot file for Chapter 13 relief) and your debts are below certain limits. For example, if your secured debts exceed $1,081,400 you cannot file a Chapter 13 bankruptcy. A secured debt is one that is tied to property. The most common secured debts are mortgage loans and auto loans. Also, your unsecured debts cannot exceed $360,475. Most debts are unsecured and include debts like credit card debts, medical bills, utility bills and store credit cards.

In order to have your Chapter 13 repayment plan confirmed, it must be feasible. This means that you have to have regular income, as well as enough disposable income to fund your repayment plan. If you don’t have enough money left over after paying for your monthly expenses, then you cannot fund your plan. Fortunately, you can use many sources of income to fund your plan. In addition to regular wages or salary, you can use income from self-employment, commissions from sales or other work, pension payments, Social Security benefits, disability and worker’s compensation benefits, unemployment payments, welfare payments, child support, alimony, royalties, rents, proceeds from selling property, and contributions from other sources.

The Chapter 13 Bankruptcy Process

A Chapter 13 case begins by filing a petition with the bankruptcy court. Unless the court orders otherwise, you must also file with the court 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. An executory contract is a contract where both parties still owe each other specific obligations such as a lease. You 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 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 you have in federal or state qualified education or tuition accounts. A qualified attorney knows what documents are needed and when they are needed.

You must also 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. A husband and wife may file a joint petition or individual petitions. The petition is the initial document filed to open your case. There are many reasons why a couple would choose to file jointly or separately. Your attorney should be able to advise you as to the best choice for your circumstances.

In order to complete the official bankruptcy forms that make up the petition, statement of financial affairs, and schedules, you must compile a list of all creditors and the amounts and nature of their claims, the source, amount, and frequency of the your income, a list of all of your property, and a detailed list of your monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc. Again, a qualified attorney will guide you through this process.

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. If you are unemployed, you can use your employed spouse’s income to fund your plan. If only one spouse files, it does not affect the credit of the non-filing spouse.

Chapter 13:

The Automatic Stay – Protecting You from Creditor Harassment

When you file your Chapter 13 petition, a trustee is appointed to administer the case. The Chapter 13 trustee both evaluates the case and serves as a disbursing agent, collecting your payments and making distributions to creditors. The trustee does this for a fee, which is built into your monthly plan payment. The fee is based on a percentage of the money to be paid to your unsecured creditors over the lifetime of your Chapter 13 plan. The percentage will vary from trustee to trustee.

Steve Johnson, Cook County Chapter 13 Trustee

Steve Johnson is a Chapter 13 trustee who handles bankruptcy cases filed in Cook County. He charges a fee of 4%. Sue Smith files a Chapter 13 plan that will repay her unsecured creditors 10% of what they are owed over the course of the plan. Sue’s total unsecured debt is $100,000. Her plan will repay $10,000 to her secured creditors. This means that Steve’s fee will be $400.

The automatic stay is one of the most attractive protections provided by law. Filing the bankruptcy petition under chapter 13 "automatically stays" (stops) most collection efforts against you and your property. Filing the petition does not stay certain types of actions. For instance, the stay does not stop:

• Criminal proceedings
• Paternity suits
• Domestic support obligations
• Child custody proceedings
• Divorce proceedings
• License suspension proceedings

The stay may be in effect for only a short time in some situations. For example, previously dismissed bankruptcy cases may limit the duration of the stay. The stay happens automatically and usually does not require the involvement of the bankruptcy court. 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 in your petition.

Chapter 13 also contains a special automatic stay provision that protects co-signers. 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 consumer filing the Chapter 13 bankruptcy. Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose. An example of a non-consumer debt would be a small business loan.

Individuals may use a Chapter 13 proceeding to save their home from foreclosure. The automatic stay stops the foreclosure proceeding as soon as you file the Chapter 13 petition. You may then bring the past-due payments current over a reasonable period of time. However, your case must be on file before a foreclosure auction takes place. If the mortgage company completes the sale of your home before you file, the stay will not protect your property. You may also lose the home if you fail to make the regular mortgage payments that come due after the Chapter 13 filing.

Between 20 and 50 days after you file the Chapter 13 petition, the Chapter 13 trustee will hold a meeting of creditors. The meeting generally lasts no more than 20 or 30 minutes. During this meeting, the trustee will place you under oath. Both the trustee and creditors may ask you questions. You must attend the meeting and answer questions regarding your financial affairs and the proposed terms of the plan. If a husband and wife file a joint petition, they both must attend the creditors' meeting and answer questions. The parties typically resolve problems with the plan either during or shortly after the creditors' meeting. Generally, you 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. Your attorney will handle these kinds of matters.

In a Chapter 13 case, to participate in distributions from the bankruptcy estate, unsecured creditors must file their proofs of claim with the court within 90 days after the first meeting of creditors. A governmental unit, like IRS, has 180 days from the date the case is filed to file a proof of claim. After the meeting of creditors, you, the Chapter 13 trustee, and those creditors who wish to attend will come to court for a hearing on your Chapter 13 repayment plan.

The Chapter 13 Plan:

Your Roadmap to a Brighter Financial Future

You must file a repayment plan with the Chapter 13 petition or within 14 days after the petition is filed. [i] A plan must be submitted for court approval and must provide for payments of fixed amounts to the trustee on a regular basis, usually every other week or once a month. 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 the bankruptcy proceeding. Secured claims are those that are tied to property and allow the creditor to take the property if you do not pay the underlying debt. Unsecured claims are generally not tied to property that you own. Credit cards are an example of an unsecured claim, and are given the lowest priority for repayment. This means that they will be the last debts satisfied by the plan.

If you want to keep property that secures a debt, your plan must provide for the regularly scheduled payments on the debt. In some situations, you may be able to “cram down” a debt to the actual value of the property. Generally, a cramdown is only available for investment property and vehicles. You cannot use a cramdown on your primary residence. For example, if your car loan balance is $10,000, but your car is only worth $6,000, you may be able to repay the actual value of the car in full satisfaction of the debt. Your plan must still repay the unsecured portion of the debt, but it receives the lowest priority of payment. This means that most people using cramdown to their advantage only pay a portion of the unsecured claim. Payments to secured creditors may follow the original payment schedule, which is often longer than the duration of the plan. If you have past-due payments, they must be made up as part of your plan.

Your plan is not required to pay your unsecured creditors in full. If your unsecured creditors receive at least as much money as they would in a Chapter 7 case, and you agree to pay all “projected disposable income” to them over the course of the plan, you can make partial repayments. In some cases, you may repay as little as 10% of the amount owed, or even less. In a Chapter 13 bankruptcy, "disposable income" is defined as your income minus your reasonable living expenses and any charitable contributions up to 15% of your gross income.

Within 30 days after filing the bankruptcy case, even if the plan has not yet been approved by the court, you must start making plan payments to the trustee. If you have secured loan payments or lease payments that are due before your plan is confirmed, you must make payments directly to your lender or landlord. Before you begin making payments, consult with your attorney. Your attorney will be able to tell you to whom and when to make payments.

Within approximately 45 days after the meeting of creditors, the bankruptcy judge must hold a confirmation hearing and decide whether your plan will work and whether it meets the requirements of the Bankruptcy Code. Creditors will receive 28 days' notice of the hearing and may object to confirmation. [ii] The most common objections revolve around the amount of compensation the creditor is to receive or how much of your income is committed to the plan.

If the court confirms the plan, the Chapter 13 trustee will begin distributing the funds paid into the plan. If the court does not confirm the plan, you may file a modified plan. You may also convert the case to a liquidation case under Chapter 7. If the court does not confirm the plan or the modified plan and dismisses the case, the trustee must return all remaining funds to you, less what the trustee is allowed to keep for costs.

Sometimes a plan will need to be modified because a creditor was left out or because a creditor threatens to object to the plan. In these cases, modification can take place before or after confirmation of the plan. This modification is sometimes done at the request of the trustee or an unsecured creditor. The consumer may also request a modification to the plan based on a change in financial circumstances, such as a loss of income which would reduce the disposable monthly income paid into the plan. The consumer may also convert to a Chapter 7 filing.

Making Your Plan Work

In order to receive a discharge, you must complete your plan. This means that you must make all of your payments and make them on time. Because your plan is supposed to include all of your disposable income, you will be living on a fixed budget for the duration of the plan. Keep in mind that you cannot take on any new debt during the lifetime of your plan without first speaking to your trustee and obtaining the court’s approval.

Keep in mind that no two Chapter 13 filings are alike. Because they are based on the specific financial circumstances of the person filing, each plan is crafted to specifically address the individual’s financial liabilities and to achieve the individual’s specific goals.

If you fail to make timely payments, your plan can be dismissed or converted to a Chapter 7 liquidation. If your circumstances change during your plan, you can modify the plan to fit those circumstances, so long as the plan is still feasible.

The Chapter 13 Discharge

Under Chapter 13, you are entitled to a discharge upon completion of all payments under the Chapter 13 plan so long as you certify that all domestic support obligations that came due prior to making such certification have been paid, that you have not received a discharge in a prior Chapter 13 case filed within two years or a prior Chapter 7, 11, or 12 case within four years, and that you have completed an approved financial management course. [iii]

The discharge releases you 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 you to collect the discharged obligations.

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
• Debts for restitution or a criminal fine included in a sentence on conviction of a crime.

You will be responsible for these debts after the Chapter 13 plan ends if you do not pay them as part of your Chapter 13 plan.

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, debts incurred to pay nondischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings. [iv] These debts can be discharged in a Chapter 13 because the creditor receives some compensation. This balances the creditor’s interest in being made whole with society’s interest in having as many consumers as possible participating in the economy.

After confirmation of a plan, circumstances may arise that prevent you from completing the plan. In such situations, you may ask the court to grant a "hardship discharge."

Generally, such a discharge is available only if your failure to complete plan payments is due to circumstances beyond your control and through no fault of your own, if your creditors have received at least as much as they would have received in a Chapter 7 liquidation case, and if 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 cannot be discharged in a Chapter 7 case. [v]