What is Chapter 13?
A Chapter 13, which is also referred to as a “Personal Reorganization” bankruptcy, may be used by individual debtors who have consistent monthly disposable income to create a 3 to 5 year repayment plan and potentially do any or all of the following:
- Pay a significantly reduced portion of their unsecured debts (without interest) and discharge the excess balances;
- Save their home from foreclosure by catching up on and reinstating their mortgage and any other home‑related debts (such as real estate taxes, association dues, and assessments);
- Pay off any significantly “upside down” vehicles (that were purchased over 2 and a half years before the bankruptcy filing) and financed furniture items (that were purchased over 1 year before the bankruptcy filing) at the property's current market value and/or at a lower rate of interest;
- Reduce, eliminate and/or pay off their personal income tax debt owed to the IRS;
- Pay off arrears owed on any domestic support obligations, such as child support and alimony;
- Protect all of their property that might otherwise be lost in a Chapter 7 filing;
The debtors (typically with the help of an attorney) must put together a Chapter 13 plan which makes a good faith proposal to do any or all of the above by making monthly payments over a period of from 3 to 5 years. If the plan is “confirmed” (approved) by the bankruptcy court and all payments are made as required, then all remaining balances on the dischargeable unsecured debts will be eliminated, the mortgage and other home‑related debts will be reinstated, the IRS and secured personal property debts will be paid off, the domestic support obligations will be brought current, and the debtors will not be forced to surrender any of their property.
Procedure for a Chapter 13 Bankruptcy:
With very limited exceptions, all debtors must take a credit counseling course before they can file their bankruptcy case. This course, which can be taken on-line, will explain the different alternatives available aside from bankruptcy and will assist the debtors with a budget analysis. The course must be provided by a non‑profit counseling agency that has been approved by the office of the United States Trustee and must be done within the 180 day period immediately before the bankruptcy case is filed.
In order to file a bankruptcy case, debtors must prepare and file a “petition” with the bankruptcy court. The petition is signed by the debtors and is submitted with a number of other documents called “schedules”, which list all of the debtors' assets, debts, income, and expenses, as well as other important financial information. The schedules must be completed truthfully and accurately, as they are meant to give the bankruptcy court a very detailed picture of the debtors' finances at the time that the petition is filed. In addition, the debtors must file a certificate showing completion of the credit counseling requirement and any pay stubs that they received within the 60 day period immediately before the bankruptcy filing. Lastly, the debtors must file a proposed Chapter 13 plan which explains to the bankruptcy court and the creditors how the debtors intend to make payments on their debts, typically over a period of from 3 to 5 years.
A very important aspect of bankruptcy is the “automatic stay” which generally goes into effect as soon as the bankruptcy petition is filed. This automatic stay prevents creditors from continuing any type of collection efforts or bothering the debtors in any way about money owed to them unless they get special permission from the Bankruptcy Court. This automatic stay includes, with some limitations, the immediate stopping of such things as lawsuits, foreclosures, repossessions, garnishments, collection letters, and harassing phone calls.
The administration of a bankruptcy case is handled by an individual, called a Trustee, who is specifically assigned by the bankruptcy court for that purpose. The duties of the Trustee include verifying the accuracy of the debtors' bankruptcy petition and schedules, determining the debtors' financial circumstances related to their bankruptcy filing, and making sure that the creditors are being treated properly under the law. In addition, the Chapter 13 Trustee is responsible for evaluating the debtors' proposed bankruptcy payment plan and for disbursing all payments made pursuant thereto.
In a Chapter 13 bankruptcy, the debtors must begin making payments to the Trustee pursuant to the Chapter 13 plan within 30 days of the date of filing of the petition. The debtors must continue making these payments each and every month for the duration of their Chapter 13 plan, which is typically between 3 and 5 years. It is very important for the debtors to make all of their payments as they come due during the course of their Chapter 13 plan. If they fall behind in their payments, their case may be dismissed by the bankruptcy court upon the request of the Trustee or a creditor.
The Trustee and the creditors have the opportunity to ask the debtors about their assets, finances and circumstances surrounding their accumulation of debt. This occurs at a brief Meeting of Creditors, which usually takes place about four to six weeks after the petition is filed. There is no judge at the creditor's meeting; instead the Trustee runs the meeting by asking the debtors questions and then allowing creditors who appear to ask a few questions of their own. All debtors are required to be present at this meeting (if a husband and wife have filed jointly, they must both be present), provide proof of their identity (typically a driver's license and social security card), and must cooperate by providing all information, records and/or documents that the Trustee may request. In addition, Chapter 13 debtors are required to have made at least their first plan payment by the time of the Meeting of Creditors or their case may be dismissed by the bankruptcy court.
The proposed Chapter 13 plan needs to be “confirmed” (approved) by the bankruptcy judge before it can take full effect. However, before this can happen, the trustee, creditors, and all other interested parties are given the opportunity to review the plan and decide if they agree with it. If a party is not satisfied with how they are being treated in the proposed plan, they may file an objection. The confirmation hearing is where these filed objections are brought up and potentially heard by the bankruptcy judge. In most cases, only the debtors' attorney (if they have one) will need to appear at the scheduled confirmation hearing. If the Chapter 13 plan is not approved at this hearing, then an amended Chapter 13 plan would likely need to be proposed and a new confirmation hearing would likely be scheduled.
Prior to the final payment being made under the Chapter 13 plan, all debtors are required to take an educational course intended to help them better manage their future finances and avoid the circumstances that led to the bankruptcy filing. It is important to note that, if this requirement is not fulfilled, then a discharge will not be entered in the debtors' case (see Entry of the Discharge, below).
In a Chapter 13 bankruptcy, the debtors will typically receive their discharge within 60 days after the successful completion of their Chapter 13 plan. Although there are circumstances that could delay or even prevent the debtor from receiving a discharge in a bankruptcy case, these are usually limited to situations where the debtor has proven to be uncooperative with the bankruptcy Trustee or has perpetrated some type of fraud or deception.