Chapter 13 Bankruptcy: The Basics
Chapter 13 bankruptcy: the basics. If you are considering bankruptcy as a solution for your financial troubles, you may be wondering if there is an option which would allow you to be able to keep your assets and still be able to pay back debt and receive a discharge for unpaid debt. If this is true, you might want to consider a Chapter 13 bankruptcy.
In a Chapter 13 bankruptcy, you have the opportunity to adjust your financial affairs without having to liquidate your assets. In this article, I will walk you through the basic process of a typical Chapter 13 case.
Who May File?
Chapter 13 is available to individuals with regular income who live in or have a place of business or property in the United States. As in Chapter 7, individuals wishing to file must receive credit counseling from an approved agency within 180 days before filing the bankruptcy petition.
You may be wondering what it means to have a “regular income.” Regular income has been interpreted to include earned wages, commissions, public assistance, social security, alimony, pensions, even payments from friends or family if they are expected to continue during the bankruptcy period. You must have enough income to pay the proposed payments under your chapter 13 plan. Anticipated, future income may not be enough for a chapter 13 bankruptcy, however, someone whose income varies from year to year, is likely to be acceptable. However, payments are not required to be at specific intervals in order to be considered regular. Additionally, the spouse or living partner of a person with a regular income, who receives a regular allowance from that partner, should be eligible for chapter 13.
In addition to the requirement for regular income, another way in which chapter 13 differs from chapter 7 is that there are limitations to the amount of debt you can have. These limitations do not create a problem for most debtors, but we will need to confirm that your unsecured debts fall below $360,475; and his or her secured debts fall below $1,081,400.
Prior Bankruptcy Cases
Just as in a chapter 7 bankruptcy, if you have a prior bankruptcy which was dismissed within the past 180 days, you may not yet be eligible for a chapter 13 discharge. You will not be eligible if a prior bankruptcy petition was dismissed during the preceding 180 days for either of the following reasons:
– You willfully violated a court order or failed to appear before the court; or
– You requested that the court dismiss the case after a creditor asked the court to lift an automatic stay.
In looking at your chapter 13 bankruptcy, we will need to make sure that the amount your unsecured creditors receive under your proposed plan would be roughly equal to the amount they would receive in a chapter 7 bankruptcy. The idea behind this is so that unsecured creditors are treated the same whether under chapter 7 or chapter 13.
When we develop your chapter 13 payment plan, we will commit all of the income over and above what is needed for you and your family’s support. This is considered “disposable income.” All of your disposable income will be committed to paying your unsecured creditors over the payment plan period (not more than 5 years). We will base your disposable income on the calculation of your current monthly income. Disposable income does not include child support or foster care payments.
In determining your disposable income, you are required to base it on your monthly income the 6 months prior to filing bankruptcy as opposed to your actual current monthly income at the time we file. When we discuss the timing of filing your bankruptcy case, we may decide to delay if your actual monthly income is much lower than the last 6 months. We can petition to modify your plan if your income is lower during your plan period than we originally anticipated. We are also able to include appropriate deductions such as
secured debt payments, car allowances, or other special circumstances.
Filing The Forms, Creating Your Plan
Once we establish that you are eligible to file a petition for chapter 13 bankruptcy, it will be time to begin the process. One of the most important documents in a chapter 13 bankruptcy filing is your proposed plan. The purpose of the plan is to communicate to the trustee and creditor how you would like to make payments and distributions. You submit the plan and have the right to modify it before confirmation by the court of the plan. If you need to make modifications after confirmation, you can modify the plan under certain circumstances after confirmation with permission from the court.
In creating the plan, you must make sure to provide for full payment of any priority debts. Even if some of these would have been discharged in a chapter 7 case, these must still be paid. Examples of priority debt include child and spousal support, most taxes and criminal fines or restitution. It also includes any money owed to a governmental-type agency. You will also include the administrative expense of the bankruptcy and the attorney’s fees in your plan, if you are making payments. Another requirement of the plan is you must set aside that portion of your future income that is necessary for the plan to be completed.
In confirming your plan, the court will look at whether the plan meets the best interests of the creditors. So in your plan, the court will look at whether or not your unsecured creditors would receive at least as much they would have gotten if you filed chapter 7 bankruptcy. The court will also look at the disposable income you have in your plan and if the trustee or unsecured creditors object to your plan, they can require all disposable income to be directed to paying your unsecured creditors for the 3 to 5 years of your plan.
When we work with you to prepare your plan, we will create a strategy that will deal with the 3 kinds of debt in a chapter 13 bankruptcy: priority, secured, and unsecured debt. We will create a plan that meets your goals, is within your available income, and that is consistent with the bankruptcy laws.
If your income is sufficient for chapter 13 bankruptcy, we submit a plan that meets the requirements for these three types of debt and pays the trustee’s administrative fees. We will then look at any disposable income that is left. If the plan includes disposable income the trustee and your unsecured creditors will likely object unless that income is directed toward paying your unsecured creditors. When we create the plan we do not have to designate what amounts go to each creditor, rather just the preferred order creditors will be paid.
In addition to the Statement of Current Income, and the Statement of Intention for Secured Property, we will also submit a disclosure of fees paid to us as your attorneys. This disclosure allows the trustee and the court to ensure that attorney fees are reasonable. All of these schedules, statements, plan and other documents are required to be filed within 14 days of the original petition we filed for your bankruptcy. If for some reason we need to extend the deadline, we can request an extension prior to the 14-day deadline.
We will go over all the forms together in order to ensure the information is accurate. By signing the forms and statements you are verifying the truth of the information. You are an important part of ensuring the accuracy of the information we are submitting to the court. Once we have submitted all of these forms, your bankruptcy case has officially started.
Just as in a chapter 7 bankruptcy, the filing of a petition sets in motion the process for relief from debt. The most significant change which occurs is the automatic stay which means that creditors are not longer allowed to take action against you in order to receive payment. In a chapter 13, it also means that, in most cases, creditors are no longer allowed to take action against codebtors even though they are not filing themselves. The automatic stay also puts a stop to attempts to evict you or foreclose on your mortgage, as well as stopping utilities being disconnected and wage garnishment.
At this time, you will be required to begin making plan payments within thirty days after filing as well as making “adequate protection” payments to any creditors whose debts are secured by purchase money security interests in personal property and personal property lessors. In addition, you will need to file any tax returns not filed for tax years ending in the four years prior to filing your petition.
The Meeting of Creditors
Approximately a month after filing, the trustee will call a first meeting of creditors, which the debtor must attend. This proceeding is also referred to as the § 341 meeting, named after the corresponding section of the bankruptcy code. Creditors rarely attend a Chapter 7 bankruptcy meeting; one or two creditors may attend a Chapter 13 meeting, especially if there is a question as to the legitimacy of some aspect of the plan. Objections are typically resolved by negotiation between the debtor or the debtor’s counsel and the creditor. If a compromise can not be reached, a judge will intervene.
The Confirmation Hearing
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 your assets re liquidated or that the 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, a modified plan can be filed. It is also possible to convert the case to a liquidation case under chapter 7.
Occasionally, a change in circumstances may impact your ability to make plan payments. For example, a creditor may object or threaten to object to a plan, or you 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.
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. The court will not enter the discharge, hover, 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.
The discharge releases you 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.
As you consider your bankruptcy options, it is important to remember that we have represented thousands of individuals just like you. We work on your behalf to ensure your chapter 7 or chapter 13 bankruptcy process is as smooth as possible. Our experience means that we can anticipate the challenges that your case might present and best represent your interests through the bankruptcy process. Call us today for a free consultation.