What Is Chapter 13 Bankruptcy?

Chapter 13 Bankruptcy is also known as a reorganization bankruptcy. Chapter13 bankruptcy is filed by individuals who want to pay off their debts over a period of three to five years. This type of bankruptcy appeals to individuals who have non-exempt property that they want to keep. It is also only an option for individuals who have predictable income and whose income is sufficient to pay their reasonable expenses with some amount left over to pay off their debts.

However, one of the main reasons why to file a chapter 13 bankruptcy is when one is behind on their mortgage payments and they wish to keep their home.

Chapter 13 allows the arrears to be put into a "plan" and paid over a 3-5 year period. However, the debtors must remain current on not only their "plan" payment but on the payment to the mortgage company.

At a confirmation hearing, the court either approves or disapproves the plan, depending on whether the plan meets the Bankruptcy Code´s requirements for confirmation. Chapter 13 is very different from chapter 7 since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor´s anticipated income over the life of the plan.

Unlike chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor action while the plan is in effect. The discharge is also considerably broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7.

THERE ARE MANY REASONS WHY PEOPLE CHOOSE CHAPTER 13 BANKRUPTCY INSTEAD OF CHAPTER 7 BANKRUPTCY. GENERALLY, YOU ARE PROBABLY A GOOD CANDIDATE FOR CHAPTER 13 BANKRUPTCIES IF YOU ARE IN ANY OF THE FOLLOWING SITUATIONS:

• You have a sincere desire to repay your debts, but you need the protection of the bankruptcy court to do so. You may think filing Chapter 13 bankruptcy is simply the "Right Thing to Do" rather than file Chapter 7.
• You are behind on your mortgage or car loan, and want to make up the missed payments over time and reinstate the original agreement. You cannot do this in Chapter 7 bankruptcy. You can make up missed payments only in Chapter 13 bankruptcy.
• You need help repaying your debts now, but need to leave open the option of filing for Chapter 7 bankruptcy in the future. This would be the case if for some reason you can´t stop incurring new debt.
• You are a family farmer who wants to pay off your debts, but you do not qualify for a Chapter 12 family farming bankruptcy because you have a large debt unrelated to farming.
• You have valuable nonexempt property. When you file for Chapter 7 bankruptcy, you get to keep certain property, called exempt. If you have a lot of nonexempt property (which you´d have to give up if you file a Chapter 7 bankruptcy), Chapter 13 bankruptcy may be the better option.
• You filed a Chapter 7 bankruptcy within the previous eight years. You cannot file for Chapter 7 again until the eight years are up.

 

ADVANTAGES OF FILING A CHAPTER 13

Stop Foreclosure Immediately

If your home is presently in foreclosure, a Chapter 13 bankruptcy filing will stop the foreclosure any time prior to the sale, and allow you to repay your mortgage arrears through your Chapter 13 bankruptcy. You will still be obligated to make all future mortgage payments directly to the mortgage company, but they may not foreclose to collect any outstanding mortgage payments.

Save Your Car

If the "repo" man is looking for your car, a Chapter 13 bankruptcy will also stop the finance company from repossessing your car. The past due payments and the entire balance on your vehicle loan will be consolidated, which you will pay off over the next three to five years. The vehicle finance company can no longer repossess your car, and you will no longer have to make a payment directly to the finance company. Only one payment is made, and that is to the Chapter 13 trustee. Under certain circumstances we can even recover your vehicle after repossession and consolidate the remaining balance.

Consolidate Student Loans

Although you may not eliminate student loans in a Chapter 7 bankruptcy, you can consolidate them, with your other bills, in a Chapter 13 bankruptcy, and stop collection action against you. Legal Helpers will stop the collection action and garnishments related to student loan debts and consolidate your bills so that you may repay them in a plan that is feasible for you.

Protect Cosigners

Your cosigners receive the same protection that you receive under Chapter 13 bankruptcy. Through a Chapter 13 bankruptcy, we will protect your cosigners from collection activity, and the creditors must wait to be paid. So, if you friend or relative cosigned on your vehicle, and you are having trouble affording the payments, we can put your remaining balance inside a Chapter 13 bankruptcy.

Beware of Refinancing

If you have equity in your home, you can file a Chapter 13 bankruptcy, protect your equity, and repay your mortgage arrears over 3-5 year period. Refinancing or taking out a second mortgage may just create an additional mortgage payment that you cannot afford, instead of repaying your mortgage arrears through a Chapter 13 bankruptcy.

Why eat up your equity with another mortgage or exhaust your retirement accounts?

You should explore all of your options, and make sure you contact us along the way so we may advise you of your legal rights. When you have quality legal representation, you become knowledgeable about your rights, and become less vulnerable to people trying to take advantage of you in a time of distress. Please remember that we offer a free consultation. Explore Chapter 13 bankruptcy as an alternative to a high-interest rate equity loan against your home or exhausting your retirement accounts.

HOW A CHAPTER 13 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;

(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 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.

The debtor must provide the chapter 13 case trustee with a copy of the tax return or transcripts for the most recent tax year husband and wife may file a joint petition or individual petitions.

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;
• 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.

When an individual files a chapter 13 petition, an impartial trustee is appointed to administer the case. In some districts, the U.S. trustee or bankruptcy administrator (2) appoints a standing trustee to serve in all chapter 13 cases. The chapter 13 trustee both evaluates the case and serves as a disbursing agent, collecting payments from the debtor and making distributions to creditors.

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 listed under and the stay may be effective only for a short time in some situations. 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.

Consumer debts are those incurred by an individual primarily for a personal, family, or household purpose. 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.

The debtor may also lose the home if he or she fails to make the regular mortgage payments that come due after the chapter 13 filing. Between 20 and 50 days after the debtor files the chapter 13 petition, the chapter 13 trustee will hold a meeting of creditor.

The meeting may be held no more than 60 days after the debtor files. 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 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. 1 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.

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.

A governmental unit, however, has 180 days from the date the case is filed file a proof of claim.

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 & CONFIRMATION HEARING

Unless the court grants an extension, the debtor must file a repayment plan with the petition or within 15 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 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. (3) 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 debtor should consult an attorney to determine the proper treatment of secured claims in 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. 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. 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.

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 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. Failure to make your plan payment is a reason for the court NOT to confirm the plan and dismiss the case. If this happens, and your home was in foreclosure, the foreclosure will start up again at the point where it was prior to the filing of the chapter 13 petition.

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. Creditors will receive 25 days´ notice of the hearing and may object to confirmation. 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." 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).

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.

THE CHAPTER 13 DISCHARGE

The bankruptcy law regarding the scope of the chapter 13 discharge is complex and has recently undergone major changes. Therefore, debtors should consult competent legal counsel prior to filing regarding the scope of 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);

(3) has completed an approved course in financial management.

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 the code. 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 non dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings.

The best way to determine whether a Chapter 13 or 7 is right for you is to speak with a qualified attorney who can best assess your personal situation and provide you with the advice you need to make an informed decision.