Background
A chapter 13 bankruptcy, also known as personal reorganization or a wage earner’s plan, is a bankruptcy plan that permits individuals to repay some or all of their debts while remaining under the protection of a bankruptcy law called the “automatic stay.” 11 U.S.C. § 362. In their chapter 13 case, the debtor(s) propose a plan in which they will make monthly installments to the chapter 13 trustee’s office. How much the monthly installment will be will depend on a debtor’s disposable income. Therefore, debtor’s budgets play a key role in this process and are examined. The trustee, in turn, will use the funds to pay creditors who have timely filed their claims. (In essence, the process works similar to a consolidation loan.) The plan usually lasts from three to five years. Once the required amount is paid, the trustee will notify the debtor(s) and their attorney will file a motion to have all eligible unpaid pre-petition debts discharged and request that the case be closed. While the case is open, creditors are barred by a rule called the automatic stay from engaging in any collection efforts.
Advantages of Chapter 13
There are some advantages that a chapter 13 bankruptcy has over chapter 7. In a chapter 13 case, debtors can stop foreclosure sales and use their chapter 13 plan to get caught on on arrearages. Debts a debtor has agreed to pay through a divorce property settlement can be included in the chapter 13 plan and paid according to what the debtor can afford. Vehicles purchased more than 910 days prior to the case filing can be crammed down (the debtor(s) pay through their chapter 13 case only the current fair market value of the vehicle; any remaining amount owed under the vehicle contract is treated as unsecured and doesn’t have to be paid in full. All secured debts, including motor vehicle debts, can be rescheduled to be extended over the life of the chapter 13 plan, thereby reducing the monthly payment. Taxes and back alimony or child support can be paid through the chapter 13 plan. Third parties who are liable for “consumer debts” are protected from creditors while the chapter 13 case is open.
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).
Chapter 13 Eligibiility
Eligibility for a chapter 13 is based on debt load. Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual’s unsecured debts are less than $394,725 and secured debts are less than $1,184,200. 11 U.S.C. § 109(e). These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor.
An individual cannot file under chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e). In addition, no individual may be a debtor under chapter 13 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111.
How 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; and (4) 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). Id. A husband and wife may file a joint petition or individual petitions. 11 U.S.C. § 302(a).
There is a filing fee. The courts must charge a $235 case filing fee and a $78 miscellaneous administrative fee. Normally the fees must be paid to the clerk of the court upon filing. With the court’s permission, however, they may be paid in installments. 28 U.S.C. § 1930(a); Fed. R. Bankr. P. 1006(b). The number of installments is limited to four, and the debtor must make the final installment no later than 120 days after filing the petition. Fed. R. Bankr. P. 1006(b). For cause shown, the court may extend the time of any installment, as long as the last installment is paid no later than 180 days after filing the petition. If a joint petition is filed, only one filing fee and one administrative fee are charged. Debtors should be aware that failure to pay these fees may result in dismissal of the case. 11 U.S.C. § 1307(c)(2).
The majority of attorney fees are paid as a part of the chapter 13 payment plan. The amount an attorney charges for handling a chapter 13 bankruptcy case is set by the courts.
Automatic Stay
Filing the petition under chapter 13 stops most collection actions against the debtor or the debtor’s property. 11 U.S.C. § 362. This rule, called the automatic stay, is very broadly written and has strong penalties for violators including actual damages, including costs and attorney fees and potentially punitive damages. The rule is designed to give debtors a breathing spell from creditors. The automatic stay stops most collection efforts, harassment and foreclosure actions.
Filing the petition does not, however, stay certain types of actions listed under 11 U.S.C. § 362(b), 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. 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). Because child support, alimony and back taxes are not considered “consumer debt” and, there may be an offset where the IRS uses post-petition tax refund to pay towards a pre-petition debt. (Bankruptcy courts are split on this matter.)
Meeting of Creditors
Under 11 U.S.C. § 341, between 21 and 50 days after the debtor files the chapter 13 petition, the chapter 13 trustee will hold a meeting of creditors (also called a 341 meeting). 11 U.S.C. § 343. If the U.S. trustee or bankruptcy administrator schedules the meeting at a place that does not have regular U.S. trustee or bankruptcy administrator staffing, the meeting may be held no more than 60 days after the debtor files. Fed. R. Bankr. P. 2003(a).
During this meeting, the trustee places the debtor under oath and confirms the debtor’s identity–typically with a drivers license and social security card–11 U.S.C. § 521(h). Both the trustee and creditors may ask questions. In preparation, seven days prior to the meeting, the debtor is required to provide the trustee a copy of his or her most recent tax return. 11 U.S.C. § 521(e)(2)(i). The debtor is required to furnish bank statements covering the date of the filing at the meeting.
The meeting is a forum to discuss the debtor’s filed schedules, signed under penalty of perjury. Here, the trustee and creditors have the opportunity to question the debtor about their assets, listed or unlisted. They can ask about the valuation of assets. 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. Additionally, the trustee will look at various transfers the debtor has made during the two years prior to filing and with the 90 days prior to filing. Failure for the debtor to attend the meeting will result in the trustee moving to have the case dismissed.
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.
Chapter 13 Plan and Confirmation Hearing
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 offer creditors less than full payment on their claims.
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). 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.
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)
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. (4) 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).
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.
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 (if the U.S. trustee or bankruptcy administrator for the debtor’s district has determined that such courses are available to the debtor). 11 U.S.C. § 1328. 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. 11 U.S.C. § 1328(h).
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.
Debts Not Discharged
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).
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