Chapter 13 bankruptcy is commonly known as “reorganization”. This is an option for those who do not qualify for Chapter 7. This is a plan where you pay back an approved sum through a payroll deduction over the course of three to five years. You pay your creditors all or a percentage of what you owe over the course of your plan. If there is an unsecured balance owed once your plan is complete the balance is discharged. The payment in your Chapter 13 plan is based on what kind of debt owed and your ability to pay (disposable income). Our office prepares this Chapter 13 plan for you.
Plan payments are payroll deducted and forwarded to the trustee. The trustee will take his or her percentage then pay your creditors according to your plan.
THE FOLLOWING QUESTIONS AND ANSWERS ARE FOR INFORMATIONAL PURPOSES ONLY, AND NOT LEGAL ADVICE. DIFFERENCES BETWEEN EACH STATE AND HOW EACH STATE IMPLEMENTS THE BANKRUPTCY CODE NECESSARILY MAKES THIS Q & A GENERAL IN NATURE. SPECIFIC INFORMATION FOR MICHIGAN RESIDENTS, AND IN PARTICULAR, ASSET AND ESTATE PLANNING, SHOULD BE ADDRESSED BY AN ATTORNEY. FEEL FREE TO CALL US WITH QUESTIONS.
QUESTIONS AND ANSWERS ABOUT CHAPTER 13 BANKRUPTCY
1. What is a chapter 13 bankruptcy and how does it work?
A chapter 13 bankruptcy case is a proceeding under federal law in which the debtor seeks relief under chapter 13 of the Bankruptcy Code. Chapter 13 is the chapter of the Bankruptcy Code which allows a person to repay all or a portion of his or her debts under the supervision and protection of the bankruptcy court. The Bankruptcy Code is the federal law that deals with bankruptcy. A person who files a chapter 13 case is called a debtor. In a chapter 13 case, the debtor must submit to the court a plan for the repayment of all or a portion of his or her debts. The plan must be approved by the court to become effective. If the court approves the debtor’s plan, most creditors will be prohibited from collecting their claims from the debtor. The debtor must make regular payments to a person called the chapter 13 trustee, who collects the money paid by the debtor and disburses it to creditors in the manner called for in the plan. Upon completion of the payments called for in the plan, the debtor is released from liability for the remainder of his or her dischargeable debts.
2. How does a chapter 13 differ from a chapter 7?
The basic difference between a chapter 7 and a chapter 13 is that in a chapter 7 the debtor’s nonexempt property (if any exists) is liquidated to pay as much as possible of the debtor’s debts, while in chapter 13 a portion of the debtor’s future income is used to pay as much of the debtor’s debts as is feasible under the debtor’s circumstances. As a practical matter, in a chapter 7 case the debtor loses all or most of his or her nonexempt property and receives a chapter 7 discharge, which releases the debtor from liability for most debts. The debtor usually retains his or her nonexempt property, but must payoff as much of his or her debts as the court deems feasible and receives a chapter 13 discharge, which is slightly broader than a chapter 7 discharge and releases the debtor from liability for a few types of debts that are not dischargeable under chapter 7. However, a chapter 13 normally lasts much longer than a chapter 7 and is usually more expensive for the debtor.
3. When is a chapter 13 preferable to a chapter 7?
Chapter 13 is usually preferable for a person who: (1) wishes to repay all or most of his or her unsecured debts and has the income with which to do so within a reasonable time, (2) has valuable nonexempt property or has valuable exempt property securing debts, either of which would be lost in a chapter 7, (3) is not eligible under means testing to maintain a chapter 7, (4) is not eligible for a chapter 7 discharge, (5) has one or more substantial debts that are dischargeable under chapter 13 but not under chapter 7, or (6) has sufficient assets with which to repay most of his or her debts, but needs temporary relief from creditors in order to do so.
4. What types of debts are not dischargeable in chapter 13?
A full chapter 13 discharge granted upon the completion of all payments required in the plan discharges a debtor from all debts except:
(1) debts that were paid outside of the plan and not covered in the plan,
(2) debts for domestic support obligations. which includes debts for child support and alimony,
(3) debts for death or personal injury caused by the debtor’s operation of a motor vehicle, vessel or aircraft while intoxicated,
(4) most tax debts,
(5) debts for restitution or criminal fines included in a sentence imposed on the debtor for conviction of a crime,
(6) debts for fraud, embezzlement or larceny,
(7) debts for student loans or educational obligations unless a court rules that not discharging the debt would impose an undue
hardship on the debtor and his or her dependents,
(8) debts for damages caused by willful or malicious conduct by the debtor,
(9) installment debts whose last payment is due after the completion of the plan,
(10) debts incurred while the plan was in effect that were not paid under the plan,
(11) debts owed to creditors who did not receive notice of the chapter 13 case, and
(12) long-term debts upon which payments were made under the plan.
A partial chapter 13 discharge, which is granted when a debtor is unable to complete the payments under a plan due to circumstances for which he or she should not be held accountable, discharges the debtor from all debts except:
(1) secured debts (i.e., debts secured by mortgages or liens).
(2) debts that were paid outside of the plan and not covered in the plan,
(3) installment debts whose last payment is due after the completion of the plan,
(4) debts incurred while the plan was in effect that were not paid under the plan,
(5) debts owed to creditors who did not receive notice of the chapter 13 case,
(6) debts that are not dischargeable in a chapter 7 case, and
(7) long-term debts upon which payments were made under the plan.
5. What is a chapter 13 plan?
It is a written plan presented to the bankruptcy court by a debtor that states how much money or property the debtor will pay to the chapter 13 trustee, how long the debtor’s payments to the chapter 13 trustee will continue, how much will be paid to each of the debtor’s creditors, and certain other matters.
6. What is a chapter 13 trustee?
A chapter 13 trustee is a person appointed by the United States trustee to collect payments from the debtor, make payments to creditors in the manner set forth in the debtor’s plan, and administer the debtor’s chapter 13 case until it is closed. In some cases the chapter 13 trustee is required to perform certain other duties. The debtor is required to cooperate with the chapter 13 trustee.
7. Must all debts be paid in full under a chapter 13 plan?
No. While priority debts, such as debts for domestic support obligations and taxes, and fully secured debts must be paid in full under a chapter 13 plan, only an amount that the debtor can reasonably afford must be paid on most debts. The unpaid balances of most debts that are not paid in full under a chapter 13 plan are discharged upon the completion or termination of the plan.
8. How much of a debtor’s income must be paid to the chapter 13 trustee under a chapter 13 plan?
Usually all of the disposable income of the debtor and the debtor’s spouse for a 3 or 5 year period must be paid to the chapter 13 trustee. Disposable income is income received by the debtor and his or her spouse that is not deemed to be necessary for the support of the debtor and his or her dependents.
9. When must the debtor begin making payments to the chapter 13 trustee and how are the payments made?
The debtor must begin making payments to the chapter 13 trustee within 30 days after the chapter 13 is filed with the court. The payments must be made regularly, usually on a weekly, bi-weekly, or monthly basis. If the debtor is employed, some courts require that the payments to be made directly to the chapter 13 trustee by the debtor’s employer.
10. How long does a chapter 13 plan last?
The required length of a chapter 13 plan depends on the debtor’s income. If the debtor’s annual income is less than the median family income for the debtor’s state and family size, the length of the plan must be 3 years, unless the debtor can justify a longer period, which may not exceed 5 years. If the debtor’s annual income exceeds the median family income, the length of the plan must be 5 years unless all unsecured claims can be paid off in a shorter period. The debtor’s annual income is his or her current monthly income multiplied by 12.
11. How are the claims of secured creditors dealt with in chapter 13?
There are four methods of dealing with secured claims in chapter 13: (1) the creditor may accept the debtor’s plan, (2) the creditor may retain its lien and be paid the full amount of its secured claim in equal monthly payments under the plan, (3) the debtor may surrender the collateral to the creditor, or (4) the creditor may be paid or dealt with outside the plan. It is important to understand that most partially-secured creditors have a secured claim only to the extent of the value of their collateral. If the debtor is in default to a secured creditor, the default must be cured (made current) within a reasonable time.
12. How are cosigned or guaranteed debts handled in chapter 13?
A cosigned or guaranteed debt is a debt of the debtor that has been cosigned or guaranteed by another person. If a cosigned or guaranteed consumer debt is being paid in full under a chapter 13 plan, the creditor may not collect the debt from the cosigner or guarantor. However, if a consumer debt is not being paid in full under the plan, the creditor may collect the unpaid portion of the debt from the cosigner or guarantor. A consumer debt is a nonbusiness debt. Creditors may collect business debts from cosigners or guarantors even if the debts are to be paid in full under the debtor’s plan.
13. May a husband and wife file a joint chapter 13?
A husband and wife may file a joint chapter 13 if each of them meets the requirements, except that only one of them need have regular income and their combined debts must meet the debt limitations.
14. May a self-employed person file a chapter 13?
Yes. A self-employed person meeting the eligibility requirements may file a chapter 13. A debtor engaged in business may continue to operate the business during his or her chapter 13.
15. May a chapter 7 be converted to a chapter 13?
Yes. An existing chapter 7 may be converted to a chapter 13 at any time at the request of the debtor if the case has not previously been converted from chapter 13 to chapter 7.
16. What fees are charged in a chapter 13?
There is a $310 Court filing fee charged when the case is filed, which may be paid in installments if necessary. In addition, the chapter 13 trustee assesses a fee of 7 percent on all payments made by the debtor under the plan. These fees are in addition to the fee charged by the debtor’s attorney.
17. Will a person lose any property if he or she files a chapter 13?
Usually not. In a chapter 13, creditors are usually paid out of the debtor’s income and not from the debtor’s property. However, if a debtor has valuable nonexempt property and has insufficient income to pay enough to creditors to satisfy the court, some of the debtor’s property may have to be used to pay creditors.
18. How does the filing of a chapter 13 affect collection proceedings and foreclosures that are filed against the debtor?
The filing of a chapter 13 automatically stays (stops) all lawsuits, attachments, garnishments, foreclosures, and other actions by creditors against the debtor or the debtor’s property. This stay is called the automatic stay. A few days after the case is filed, the court will mail a notice to all creditors advising them of the automatic stay. Certain creditors may be notified sooner. if necessary. Most creditors are prohibited from proceeding against the debtor during the entire course of the chapter 13. If the debtor is later granted a chapter 13 discharge, the creditors will then be prohibited from collecting the discharged debts from the debtor after the case is closed. If the debtor has had a prior bankruptcy case dismissed within the past year, he or she may be denied the protection of the automatic stay.
19. How does filing a chapter 13 affect a person’s credit rating?
It may worsen it, at least temporarily. However, if most of a person’s debts are ultimately paid off under a chapter 13 plan, that fact may be taken into account by credit reporting agencies. If very little is paid on most debts, the effect of a chapter 13 on a person’s credit rating may be similar to that of a chapter 7.
20. Is a person’s employer notified when he or she files a chapter 13?
In most cases, yes. Many courts require a debtor’s employer to make payments to the chapter 13 trustee on the debtor’s behalf. Also, the chapter 13 trustee may contact an employer to verify the debtors income. However, if there are compelling reasons for not informing an employer in a particular case, it may be possible to make other arrangements for the required information and payments.
21. Does a person lose any legal rights by filing a chapter 13?
No. A chapter 13 is a civil proceeding and not a criminal proceeding. Therefore, a person does not lose any legal or constitutional rights by filing a chapter 13.
22. May employers or government agencies discriminate against persons who file chapter 13?
No. It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed a chapter 13. It is also illegal for local, state, or federal governmental agencies to discriminate against a person as to the granting of licenses, permits, student loans, and similar grants because that person has filed a chapter 13.
23. When does the debtor have to appear in court in a chapter 13?
Most debtors have to appear in court at least twice: once for a hearing called the meeting of creditors, and once for a hearing on the confirmation of the debtor’s chapter 13 plan. The meeting of creditors is usually held about a month after the case is filed. The confirmation hearing may be held on the same day as the meeting of creditors or at a later date, depending on the scheduling practices in the local court. If difficulties or unusual circumstances arise during the course of a case, additional court appearances may be necessary.
24. What if the court does not approve a debtor’s chapter 13 plan?
If the court will not approve the plan initially proposed by a debtor, the debtor may modify the plan and seek court approval of the modified plan. If the court does not approve a plan, it will usually give its reasons for refusing to do so, and the plan may then be appropriately modified so as become acceptable to the court. A debtor who does not wish to modify a proposed plan may either convert the case to a chapter 7 or dismiss the case.
25. How are the claims of unsecured creditors handled in chapter 13?
Unsecured creditors, including those with priority claims. must file their claims with the bankruptcy court within 90 days after the first date set for the meeting of creditors in order for their claims to be allowed. Unsecured creditors who fail to file claims within that period are barred from doing so, and upon completion of the plan their claims will be discharged. The debtor may file a claim on behalf of a creditor, if desired. After the claims have been filed, the debtor may file objections to any claims that he or she disputes. When the claims have been approved by the court, the chapter 13 trustee begins paying unsecured creditors in the manner and in the amounts provided for in the debtor’s chapter 13 plan. Payments to secured creditors, priority creditors, and special classes of unsecured creditors may begin earlier, if desired.
26. What if the debtor is temporarily unable to make the chapter 13 payments?
If the debtor is temporarily out of work, injured, or otherwise unable to make the payments required under a chapter 13 plan, the plan can usually be modified so as to enable the debtor to resume the payments when he or she is able to do so. If it appears that the debtor’s inability to make the required payments will continue indefinitely or for an extended period, the case may be dismissed or converted to a chapter 7.
27. What if the debtor incurs new debts or needs credit during a chapter 13?
Only two types of credit obligations or debts incurred after the filing of the case may be included in a chapter 13 plan. These are: (l) debts for taxes that become payable while the case is pending, and (2) consumer debts arising after the filing of the case that are for property or services necessary for the debtor’s performance under the plan and that are approved in advance by the chapter 13 trustee. All other debts or credit obligations incurred after the case is filed must be paid by the debtor outside the plan. Some courts issue an order prohibiting the debtor from incurring new debts during the case unless they are approved in advance by the chapter 13 trustee. Therefore, the approval of the chapter 13 trustee should be obtained before incurring credit or new debts after the case has been filed. The incurrence of regular debts, such as debts for telephone service or utilities, do not require the trustee’s approval.
28. What should the debtor do if he or she moves while the case is pending?
The debtor should immediately notify the bankruptcy court and the chapter 13 trustee in writing of the new address. Most communications in a chapter 13 are by mail, and if the debtor fails to receive an order of the court or a notice from the chapter 13 trustee because of an incorrect address, the case may be dismissed. Many courts have change-of-address forms that may be used if the debtor moves.
29. What if the debtor later decides to discontinue the chapter 13?
The debtor has the right to either dismiss a chapter 13 or convert it to a chapter 7 at any time for any reason. However, if the debtor simply stops making the required chapter 13 payments, the court may compel the debtor or the debtor’s employer to make the payments and to comply with the orders of the court. Therefore, a debtor who wishes to discontinue a chapter 13 should do so through his or her attorney.
30. What happens if a debtor is unable to complete the chapter 13 payments?
A debtor who is unable to complete the chapter 13 payments has three options: (l) dismiss the chapter 13. (2) convert the chapter 13 to a chapter 7, or (3) if the debtor is unable to complete the payments due to circumstances for which he or she should not be held accountable, close the case and obtain a partial chapter 13 discharge as described in the answer to Question 6 above.
Should you have other questions please feel free to call Corcoran Law Office at (231) 929-7000.