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How Chapter 13 Bankruptcies Work

The Initial Steps. Chapter 13 cases can be quite complicated. Definitely seek the help of an attorney specializing in bankruptcy as quickly as possible. Your delay may allow a foreclosure or repossession to proceed to the point where the chapter 13 bankruptcy can no longer help.

Unlike a chapter 7 that has some restrictions on higher income filers, any individual with a regular income can file a chapter 13 bankruptcy. An “individual with regular income” includes not only wage earners, but also recipients of government benefits, alimony, or support payments, or any other type of regular income. You cannot use chapter 13 if your debts are significantly in excess of $1 million, but this affects few consumers. Family farmers or fishermen can also proceed under chapter 12 instead of chapter 13, and this will often be a better choice.

Most of the initial steps in a chapter 13 case are similar to those in chapter 7 discussed earlier in this chapter. The bankruptcy begins with a petition and a certificate from an approved credit counseling agency. As with a chapter 7, additional forms and schedules must also be filed either with your petition or shortly thereafter.

The major difference with a chapter 13 filing is that a plan must be submitted at the same time that describes when creditors will be paid, how they will be paid, and how much they will be paid. In a chapter 13 bankruptcy, you will not lose any property as long as you have a plan to pay out all or part of what you owe for each debt over a period of years, usually from future income. You must begin making payments under that plan within thirty days after filing.

The filing immediately establishes the automatic stay, which prevents any further creditor acts against you or your property. Unlike a chapter 7, the automatic stay in chapter 13 prevents creditors from taking any action against your cosigners who have not filed bankruptcy, so long as your plan provides for payment of the debt.

A chapter 13 trustee is then appointed. A meeting of creditors is held where the focus is usually on whether your plan meets legal requirements and whether you can afford to make the plan payments.

Bankruptcy 13 Plan. This is a document outlining how you propose to make payments to various creditors while the plan is in effect. A chapter 13 plan normally requires monthly payments to the bankruptcy trustee over a period of three years, but courts can approve plans as long as five years.

Your payments are held by the chapter 13 trustee and not paid out to creditors until your chapter 13 plan is approved by the court after a “confirmation hearing,” usually held roughly a month after the first meeting of creditors. Depending upon the terms of your proposed plan, or if required by the court, you may need to begin making payments directly to some secured creditors within thirty days after filing your bankruptcy case.

The court will inquire into whether your plan meets the requirements of chapter 13 and will hear any objections to approval of your chapter 13 plan raised by creditors or the trustee. If there are no objections, there may not even be a hearing and you then need not go to court. If the court does not approve your chapter 13 plan, the payments are returned to you after deduction of administrative costs.

What Will I Have to Pay Under the Chapter 13 Plan? How much you have to pay under your plan depends on whether debt is secured or unsecured and what the court will allow. Typically, after paying for necessary living expenses, you pay the balance of your income to the trustee while your bankruptcy proceeds. If you choose, this can occur automatically by wage deduction.

To keep your home, car, or other collateral for a loan, you must pay current and past-due payments in full under your plan, but you can spread those payments out over three to five years. Your unsecured creditors also receive a share of the payments made under the plan. By paying the nonexempt value of your property over a period of years, you get to keep all of your property under a chapter 13.

Depending upon the amount of your nonexempt property and income left over after paying necessary living expenses, your plan may pay unsecured creditors at less than the full amount they are owed, often as low as 5% to 10% of what they are owed. In most cases, consumers are no longer required to pay unsecured creditors for any interest, late fees, and other penalty charges that would otherwise come due after the chapter 13 is filed. If your income is above the state median family income, the amount you are required to pay unsecured creditors is based on a formula that considers the actual amounts you spend for some expenses and fixed amounts for other expenses.

What Does a Trustee Do in Chapter 13? The chapter 13 trustee has more to do than the chapter 7 trustee. The chapter 13 trustee may require that you provide additional documents, such as tax returns and documents showing that homes and cars are insured. The chapter 13 trustee collects your payments and distributes that money to creditors. The trustee will ask the court to dismiss your case if you fail to make the plan payments.

To get paid by the trustee, creditors file a proof of claim with the bankruptcy court. Both you and the trustee can object to the claim if the creditor overcharged you or if you have defenses to owing the money. The bankruptcy judge will decide how much the creditor should be paid.

The chapter 13 trustee’s opinion is not necessarily the last word on any matter. You can raise any appropriate issue with the bankruptcy judge. Trustees are not judges and have no power to rule on disputes between you and your creditors.

What If I Don’t Make My Payments Under the Plan? Once your plan is in place, your case is likely to be dismissed if you fail to make payments or keep up with any alimony and child support payments, and you could be back to where you were before bankruptcy. When you cannot make plan payments, though, you still may have four options:

  • Hardship Discharge. Bankruptcy law provides for a hardship discharge of debts if problems are caused by circumstances for which you are not responsible, such as serious deterioration of your financial circumstances.
  • Modification. It is possible to modify a plan to address new problems, but creditors have a right to object to the modification, and, if so, the court will decide whether to allow the modification.
  • Conversion. You have the right to convert a chapter 13 case to a chapter 7 case. After the conversion, nonexempt property is liquidated and you receive a chapter 7 discharge.
  • Dismissal. Occasionally, dismissal is preferable to any of the other options. You have the right in most cases to dismiss your chapter 13 case.

What Debts Are Discharged After Completing the Chapter 13? The final step in a successfully completed chapter 13 case is the discharge. As with chapter 7, you must complete an educational course on personal finances before you will be given a discharge.

The discharge available in chapter 13 covers more debts than a discharge under chapter 7, including all debts provided for by the plan, except for support and alimony payments and long-term debts with final payments due after the completion of the plan. Other chapter 13 exceptions to discharge are most student loans (unless you can prove that repaying them will be an “undue hardship”), drunk driving debts, and criminal restitution debts.

A chapter 13 discharge eliminates legal responsibility on some debts that are not dischargeable in a chapter 7 case, such as claims for injuries to property purposely caused by you and debts from some property settlements in a divorce or separation proceeding. If you have caught up on any mortgage debt or other secured loan, the loan will be reinstated and the law requires the creditor to treat you as if you never fell behind.