Questions and Answers About Chapter 13 Bankruptcy

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THE FOLLOWING QUESTIONS AND ANSWERS ARE FOR INFORMATIONAL PURPOSES ONLY, AND NOT LEGAL ADVICE. THIS Q & A  IS GENERAL IN NATURE.  SPECIFIC INFORMATION SHOULD BE ADDRESSED BY AN ATTORNEY.  IF YOU HAVE ANY OTHER QUESTIONS PLEASE FEEL FREE TO CALL CORCORAN LAW OFFICE AT (231) 929-7000.

1. What is a chapter 13 bankruptcy and how does it work?

A Chapter 13 allows a person to repay all or a portion of their debts. A person who files a chapter 13 is called a debtor. In a chapter 13, the debtor must submit to the Court a Plan for repayment of all or a portion of 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 Chapter 13 Trustee, who collects the money and disburses it to creditors in the manner called for in the Plan. Upon completion of the payments, 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?

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.  The debtor loses all or most nonexempt property and receives a Chapter 7 discharge.  In Chapter 13 a portion of the debtor’s income is used to pay as much of the debtor’s debts as is feasible. The debtor usually retains their nonexempt property, but must payoff as much of his or her debts as the Court deems feasible. A Chapter 13 lasts much longer than a Chapter 7 and is usually more expensive.

3. What is a Chapter 13 Plan?

It is a written Plan presented to the Bankruptcy Court by the debtor.   It states how much money the debtor will pay, how long the debtor will make payments, how much will be paid to each of the creditors, and certain other matters.

4. 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.

5. Must all debts be paid in full under a Chapter 13 Plan?

No. Debts for domestic support obligations, taxes, and fully secured debts must be paid in full.  The unpaid balances of most debts that are not paid in full under a Chapter 13 are discharged upon completion.

6. How much of a debtor’s income must be paid 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.  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 their dependents.

7. When must the debtor begin making payments and how are the payments made?

Within 30 days after the Chapter 13 is filed with the Court.  If the debtor is employed, the payments must be made by the debtor’s employer.

8. How long does a Chapter 13 Plan last?

The required length 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.

9. How are co-signed debts handled in Chapter 13?

If a co-signed debt is being paid in full under a Chapter 13 Plan, the creditor may not collect the debt from the co-signer.  However, if the debt is not being paid in full under the Plan, the creditor may collect the unpaid portion of the debt from the co-signer.  Creditors may collect business debts from cosigners or guarantors even if the debts are to be paid in full under the debtor’s Plan.

10. 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 their Chapter 13.

11. May a Chapter 7 be converted to a Chapter 13?

Yes. A case may be converted at any time at the request of the debtor if the case has not previously been converted from Chapter 13 to Chapter 7.

12. How does filing a Chapter 13 affect collection proceedings and foreclosures that are filed against the debtor?

Filing Chapter 13 automatically stops lawsuits, garnishments, foreclosures, and other actions by creditors.  This is called the automatic stay.  After the case is filed, the court will mail a notice to all creditors advising them of the automatic stay.  If the debtor is later granted a Chapter 13 discharge, the creditors will then be prohibited from collecting the discharged debts from the debtor.  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.

13. How does filing 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, that 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.

14. Is a person’s employer notified when they file a Chapter 13?

In most cases, yes.  The Court requires a debtor’s employer to make payments 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.

15. When does the debtor have to appear in Court?

Debtors have to appear in Court for a hearing called the Meeting of Creditors.  The Meeting of Creditors is usually held about a month after the case is filed.  If difficulties or unusual circumstances arise during the course of a case, additional Court appearances may be necessary.

16. What if the debtor is temporarily unable to make the Chapter 13 payments?

If the debtor is temporarily unable to make the payments then the debtor can modified the Plan to enable the debtor to resume payments when able to do so.  If 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.

17. What if the debtor incurs new debts or needs credit during a Chapter 13?

Approval of the Court is required to obtain credit after the case has been filed.

18. What happens if a debtor is unable to complete the Chapter 13 payments?

A debtor can dismiss the case or convert to a Chapter 7.