CHAPTER 13

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If you wish to file for Chapter 13 bankruptcy, The Law Office of Carl Shaff II can help you determine if you are eligible to file a petition under this bankruptcy code and whether if it is a better choice for you.

Filing for bankruptcy is a perfect way to get out of burdensome and unmanageable debt load. However, filling out the bankruptcy forms and understanding the process can be daunting and stressful. Carl Shaff lawyers are passionate about helping their clients regain control of their financial lives. With over thirty years of expertise and thousands of case victories, Carl Shaff understands the complexities of bankruptcy and will not just assist you in handling the paperwork from start to finish, but most importantly they can provide competent legal advice throughout the bankruptcy process to help you achieve your financial goals and get things back on track so you could have a brighter future.

Chapter 13 – Bankruptcy Principles

This portion of the Bankruptcy Code provides for the adjustment of debts of a person with regular income. Chapter 13 enables a debtor, typically three to five years, to hold property and pay debts over time.

Background

A bankruptcy in chapter 13 is also called a wage earner’s plan. It helps people with daily earnings to build a strategy to repay all or part of their debts. Under this clause, debtors offer a repayment plan to allow payments over three to five  years to creditors. If the actual monthly income of the debtor is less than the applicable state median, the arrangement will be for three years unless the court “for cause” accepts a longer-term. (1) If the current monthly income of the debtor is greater than the applicable state median, the plan would usually be for five years. A plan will not, in any event, allow for payments for a duration longer than five years. 11 U.S.C. § 1322(d). The law prohibits creditors from beginning or continuing collection attempts during this period.

Six aspects of a chapter 13 proceeding are discussed in this chapter: the benefits of selecting chapter 13, the eligibility criteria for chapter 13, how a chapter 13 proceeding works, making the plan work, and the special discharge for chapter 13.

The Benefits of Chapter 13

Chapter 13 offers several advantages to individuals over liquidation under chapter 7. Perhaps most importantly, chapter 13 provides an opportunity for individuals to save their homes from foreclosure.

Individuals can stop foreclosure proceedings by filing under this chapter, and can over time cure delinquent mortgage payments. Nevertheless, all mortgage payments that are due during the chapter 13 plan must still be made on time. Another benefit of Chapter 13 is that it enables persons (other than a mortgage on their primary residence) to reschedule secured loans and extend them throughout the plan under Chapter 13. Doing this can decrease the payments. There is also a special clause of Chapter 13 to cover third parties who are liable to the debtor for ‘consumer debt.’ Co signers can be bound by this clause. Finally, chapter 13 serves as a restructuring loan in which the person makes the payments of the plan to a trustee of chapter 13 who then distributes payments to creditors. Individuals, when under Chapter 13 safeguards, would have no direct contact with creditors.

Eligibility criteria for Chapter 13

Any person is eligible for Chapter 13 relief, even if they are self-employed or run an unincorporated corporation, as long as the unsecured debts of the entity are less than $394,725 and secured debts are less than $1,184,200. 11 U.S.C. § 109 § 109(e). These sums are regularly changed to reflect adjustments in the index of consumer prices. A company or association could not be a debtor under chapter 13. Id.

A person cannot file under chapter 13 or any other chapter if, a prior bankruptcy request was dismissed within the preceding 180 days due to the debtor’s deliberate failure to appear before the court or comply with court orders or was voluntarily dismissed after creditors requested relief from the bankruptcy court to reclaim property on which they held liens. 11 U.S.C. §§ 109(g), 362(d) and (e). Also, no person can be a debtor under Chapter 13 or any chapter of the Bankruptcy Code unless he or she has obtained credit counseling from an accredited credit counseling organization, either in an individual or group briefing, within 180 days before filing. 11 U.S.C. §§ 109, 111. There are exceptions in emergency cases or when the U.S. trustee (or bankruptcy administrator) has decided that there are insufficient licensed agencies to offer the requisite counseling. If during the mandatory credit counseling, a debt management plan is created, it must be filed with the court.

How Chapter 13 Works

A case in Chapter 13 starts with the filing of a petition with the bankruptcy court representing the area where the debtor has a home or domicile. The debtor must also file with the court unless the court rules otherwise: (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a schedule of performance arrangements and unexpired leases; and (4) a statement of financial affairs.

Fed. R. Bankr. P. 1007(b). The debtor must also file a credit counseling certificate and a copy of any debt repayment plan developed through credit counseling; proof of payment from employers, if any, obtained 60 days before filing; a declaration of monthly profits and any anticipated rise in after filing income or expenses; and a report of any interest the debtor has within the federal or state eligible education or tuition accounts. 11 U.S.C. § 521. The debtor must send a copy of the tax return or transcript for the most recent tax year to the case trustee in Chapter 13, as well as the tax returns filed in the case (including tax returns for prior years that had not been filed when the case began). A joint petition or individual petitions may be filed by a husband and wife. 11 U.S.C. § 302(a). (The Official

Forms could be purchased at legal stationery stores or downloaded from the web at www.uscourts.gov/bkforms/index.html. They are not available from the court.)

A $235 case filing fee and a $75 miscellaneous administrative fee must be billed by the courts. Usually, upon filing, the payments must be paid to the court clerk. However, with approval from the judge, they can be paid in installments. 28 U.S.C. § 1930(a); Fed. R. Bankr. P. 1006(b); Bankruptcy Court Miscellaneous Fee Schedule, Item 8. The number of payments is restricted to four and the final payment must be made by the debtor no later than 120 days after the petition has been submitted. Fed.

  1. Bankr. P. 1006(b). The court may extend the term of any installment for the rationale shown, as long as the last installment is paid no later than 180 days after the petition has been filed. Id. The debtor may also pay an administrative fee of $75 in installments. If a joint petition is filed, only one filing fee and one administrative fee shall be paid. Debtors should be mindful that failure to pay these fees can lead to the dismissal of the case. 11 U.S.C. § 1307(c)(2).

To complete the Official Bankruptcy Forms that make up the petition, statement of financial affairs, and schedules, the debtor must collect the following details:

  1. A list of all creditors and the sum and nature of their claims;
  2. The source, sum, and frequency of the debtor’s income;
  3. A list of all of the debtor’s assets; and
  4. A complete list of the debtor’s monthly living expenses, i.e., food, clothes, lodging, utilities, taxes, transportation, medication, etc.

Married couples, in any case of whether they are filing a joint petition, separate individual petitions, or even if only one partner is filing, must collect this information for their spouse. The income and expenses of a non-filing spouse are needed in a situation where only one spouse files, so that the court, the trustee, and creditors can determine the financial status of the household.

When a person files a chapter 13 petition, an independent trustee is assigned to oversee the case. 11 U.S.C. § 1302. In certain districts, the U.S. trustee or bankruptcy administrator (2) appoints a standing trustee to serve in all chapter 13 situations. 28 U.S.C. § 586(b). Chapter 13 trustee both reviews the case and acts as a disbursing agent, collecting payments from the debtor and making distributions to creditors. 11 § 1302 of the U.S.C. (b). Submitting the petition under chapter 13 “automatically stays” (stops) most collection proceedings against the debtor or the debtor’s property. 11 U.S.C. § 362(b). However, the filing of an appeal does not retain certain forms of actions listed under 11 U.S.C. § 362(b), and the stay can only be valid for a brief amount of time in certain cases. The stay results from the application of the law and does not entail any legal action. As long as the stay is in effect, creditors generally cannot initiate or pursue lawsuits, wage garnishments, or even make phone calls demanding payments. The bankruptcy clerk gives notice of the bankruptcy case to all creditors whose names and addresses are given by the debtor.

Chapter 13 also provides a special automatic stay clause to cover co-debtors. Unless otherwise approved by the bankruptcy court, the creditor does not attempt to collect the “consumer debt” from any person who is liable with the debtor. 11 U.S.C. § 1301(a). Consumer debts are those incurred by an individual solely for personal, family, or household purposes. 11 U.S.C. § 101(8).

Individuals can use Chapter 13 to save their homes from foreclosure. The automatic stay stops the foreclosure proceeding as soon as the petition of Chapter 13 is filed. The person can then make current past-due payments over a fair period of time. However, the debtor can also lose his home if the mortgage company concludes a foreclosure sale under state law before a lawsuit is lodged by the debtor. 11 U.S.C. § 1322(c). The debtor will also lose his or her home if he or she fails to make the regular mortgage payments due after the filing of Chapter 13.

Between 21 and 50 days, after the debtor capitulates the chapter 13 petition, the Trustee of Chapter 13 shall hold a meeting of the creditors. If the U.S. trustee or bankruptcy administrator has scheduled a meeting at a venue that does not have a normal U.S. trustee or bankruptcy administrator staff, the meeting must be held no longer than 60 days after the debtor files. Fed. R. Bankr. P. 2003(a). At this meeting, the trustee shall make an oath to the debtor, and both the trustee and the creditors may ask questions. The debtor must attend the meeting and address questions about his or her financial affairs and the proposed terms of the plan. 11 U.S.C. § 343. If a husband and wife file a joint petition, both of them must attend the creditors’ meeting and answer questions. To protect their impartial judgment, bankruptcy judges are forbidden from attending the meeting of creditors. 11 U.S.C. § 341(c). The parties generally address issues with the plan during or shortly after the creditors’ conference.

Generally, the debtor can prevent problems by ensuring that the petition and proposal are complete and correct and by consulting the trustee before the meeting.

In the case of Chapter 13, to participate in the distributions of the bankrupt assets, unsecured creditors must send their claims to the court within 90 days after the first date set for the meeting of creditors.  Fed. R. Bankr. P. 3002(c). The government unit shall, however, have 180 days from the date the case is filed file a proof of claim.11 U.S.C. § 502(b)(9).

Following the meeting of the creditors, the debtor, the trustee of Chapter 13, and the creditors who wish to attend will come to court for a hearing on the debtor’s chapter 13 repayment plan.

The 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 has been filed.  Fed. R. Bankr. P. 3015. The proposal must be submitted for approval by the court and must allow for the payment of fixed sums to the trustee regularly, normally biweekly or monthly basis. The trustee then distributes the funds to the creditors under the terms of the plan, which can give creditors less than the full payment of their claims. There are three forms of claims: priority, secured, and unsecured. Priority claims are those given special status under the bankruptcy law, such as most taxes and the expenses of bankruptcy proceedings. (3) Secured claims are those on which the borrower has the right to recover certain properties (i.e. collateral) if the borrower fails to pay the underlying debt. In contrast with the secured claims, the unsecured claims are typically those on which the claimant has no exclusive right to collect the particular property owned by the debtor.

The plan must pay priority claims in full unless a particular priority creditor agrees to differential treatment of the claim or, in the case of a domestic support commitment, unless the debtor contributes all of the “disposable income”-as discussed below-to a five-year plan. 11 U.S.C. § 1322(a).

If the debtor wants to keep the collateral in place to protect a specific claim, the plan must provide that the holder of the secured claim receives at least the worth of the collateral. If the liability underlying the secured claim has been used to obtain the collateral (e.g. a car loan) and the debt has been accrued within certain timeframes before the bankruptcy is filed, the plan must allow for the full payment of the debt, not just the worth of the collateral (which may be less due to depreciation). Payments to such secured creditors (i.e. home mortgage lenders) can be made on the original loan repayment timeline (which may be longer than the plan) as long as any arrearage is made up during the plan. The debtor should consult the lawyer to decide the correct treatment of the secured claims in the plan.

The agreement would not have to pay unsecured claims in full as long as it guarantees that the debtor spends all estimated “disposable revenue” over an “applicable commitment period” and as long as unsecured creditors receive at least as much under the plan as they would have earned if the debtor’s assets had been liquidated in compliance with Chapter 7. 11 U.S.C. § 1325. In Chapter 13, “disposable income” means income (other than child support payments earned by the debtor) less amount reasonably required for the care or support of the debtor or dependent and less charitable donations of up to 15% of the gross income of the debtor. If the debtor owns a business, the concept of disposable income excludes those amounts that are required for ordinary operating expenses. 11 U.S.C. §1325(b)(2)A) and (B). “Applicable commitment period” depends on the current monthly earnings of the debtor.

The commitment period in force must be three years if the current monthly income is less than the state median for a family of the same size-and five years if the current monthly income is greater than the family of the same size. 11 U.S.C. § 1325(d).

The plan can be less than the applicable commitment period (three or five years) only if the unpaid debt is paid in full over a shorter time. Within 30 days after filing the bankruptcy petition, even though the agreement has not yet been accepted by the court, the debtor must begin plan payments to the trustee. 11 U.S.C. § 1326(a)(1). If any secured loan or lease payments are due before the debtor’s plan is confirmed (usually home and car payments), the debtor must make sufficient security payments directly to the secured lender or lessor- deducting the sum charged from the amount that would otherwise have been paid to the trustee. Id.

The bankruptcy judge must hold a confirmation hearing no later than 45 days after the meeting of the creditors to determine if the agreement is viable and meet the confirmation requirements set out in the Bankruptcy Code. 11 U.S.C. §§ 1324, 1325. Creditors will receive 28 days’ notice of the hearing and may object to approval. Fed. R. Bankr. P. 2002(b). Although a number of concerns can be raised, the most common ones are that the payments offered under the plan are less than the creditors would have received if the debtor’s assets had been liquidated or the debtor’s plan did not devote all of the borrower’s expected disposable income for the three or five-year commitment duration in effect.

If the court confirms the plan, the trustee of Chapter 13 will allocate the funds obtained under the plan “as soon as is practicable.” 11 U.S.C. § 1326(a)(2). If the court refuses to confirm the plan, the debtor may file a modified plan. 11 U.S.C. § 1323. The debtor can also convert the case to a liquidation case under chapter 7. (4) 11 U.S.C. § 1307(a). If the court refuses to confirm the plan or the amended plan and instead dismisses the case, the court may allow the trustee to retain some of the funds for the expenses, but the trustee must return all the 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 could threaten the ability of the debtor to make plan payments.

For example, a creditor may object or threaten to object to a plan, or the debtor may have unintentionally neglected to list all creditors. In such situations, the plan may be changed either before or after confirmation. 11 U.S.C. §§ 1323, 1329. Modification after confirmation is not limited to the initiative of the debtor but maybe at the behest of the trustee or the unsecured creditor. 11 U.S.C. 1329(a).

Making the Plan Work

The terms of the confirmed plan shall bind the debtor and each creditor. 11 U.S.C. § 1327. If the court has confirmed the plan, the debtor must make the plan work. The debtor must make regular payments to the trustee either directly or via a payroll deduction, which would entail a long-term transition to operating on a fixed budget. Furthermore, although the confirmation of the agreement grants the debtor the right to hold property as long as payments are received, the debtor must not incur new debt without consulting the trustee, as additional debt may threaten the debtor’s ability to complete the plan. 11 U.S.C. §§ 1305(c), 1322(a)(1), 1327.

The debtor can make contributions to the plan by payroll deductions. This strategy increases the probability that payments will be received on time and the debtor will complete the plan. In any event, if the debtor fails to make payments due under the confirmed plan, the court may dismiss the case or turn it into a liquidation case under Chapter 7 of the Bankruptcy Code. 11 U.S.C. § 1307(c). The court can also dismiss or convert the debtor’s case if the debtor fails to pay any post-filing domestic support obligations (i.e., child support, alimony) or fails to make the necessary tax filings in the case. 11 U.S.C. § 1307(c) and (e), 1308, 521.

The Chapter 13 Discharge

The bankruptcy law concerning the extent of discharge in Chapter 13 is complex and has recently undergone significant changes. Therefore, before filing, debtors should consult qualified legal counsel such as Carl Shaff on the extent of discharge in respect of Chapter 13.

A chapter 13 debtor is entitled to a discharge upon fulfillment of all payments under Chapter 13 plan, providing that the debtor: (1) certifies (if applicable) that all domestic support commitments arising before the certification have been paid; (2) has not been discharged in a prior case filed within a given period (two years for prior chapter 13 cases and four years for prior chapter 7, 11 and 12 cases); and (3) has completed an authorized course in financial management (if the U.S. trustee or bankruptcy administrator for the debtor’s district has determined that those courses apply to the debtor). 11 U.S.C. 1328. The court can not, however, enter the discharge until it decides, following notification and trial, that there is no cause to assume that there is an ongoing action that may result in a restriction on the homestead exemption of the debtor. 11 U.S.C. § 1328(h).

The discharge shall release the debtor from any debts paid for or disallowed by the plan (under section 502), with restricted exceptions. Creditors provided for in full or in part under the Chapter 13 plan may no longer undertake or proceed with any civil or other proceedings against the debtor for the collection of the discharged obligations.

As a general rule, the discharge shall free the debtor from any debts arranged for or disallowed by the plan, except for certain debts referenced in 11 U.S.C. § 1328. Debts not discharged in chapter 13 include certain long term commitments (such as home mortgages), pension or child care debts, certain taxes, debts on most government-funded or promised student grants or overpayments, debts arising from death or personal injuries incurred by driving while drunk or under the influence of drugs, and debts for restitution or a criminal fine included in a sentence on the debtor’s conviction of an offense.

To the point that they are not adequately paid in compliance with the Chapter 13 plan, the claimant will also be liable for these loans until the bankruptcy proceeding has been settled. Debts for money or property gained under pretenses, debts for theft or forfeiture while operating in a fiduciary capacity, and debts for reimbursement or damages awarded in civil proceedings for willful or malicious actions by the debtor which cause personal injury or death to an individual shall be discharged unless a creditor timely submits and prevails in an action to have such debts declared non-dischargeable. 11 U.S.C. §§ 1328, 523(c); Fed. R. Bankr. P. 4007(c).

The discharge in a chapter 13 case is a bit broader than in a chapter 7 case. Debts dischargeable in chapter 13, but not in chapter 7, include debts for deliberate and malicious property damage (as opposed to a person), debts accrued for the payment of non-dischargeable tax liabilities, and debts resulting from property agreements in divorce or separation proceedings. 11 U.S.C. § 1328(a).

The Chapter 13 Hardship Discharge

After the plan has been confirmed, circumstances can occur that prevent the debtor from completing the plan. In such cases, the debtor can ask the court to grant a “hardship discharge.” 11 U.S.C. § 1328(b). Generally, such discharge is only available if: (1) the inability of the debtor to fulfill the payment of the plan is due to circumstances outside the control of the debtor and by no fault of the debtor; (2) the creditors have received at least as much as they would have received in the liquidation situation of Chapter 7, and (3) modification of the plan is not possible. Injury or illness that precludes employment from being sufficient to finance even a modified plan may serve as a basis for the discharge of difficulties. The hardship discharge is more restrictive than the discharge mentioned above and does not extend to any debts that are non-dischargeable in a chapter 7 case. 11 U.S.C. § 523.


Notes

  1. The “current monthly income” received by the debtor is a specified term in the Bankruptcy Code and shall mean the average monthly income received over the six calendar months before the commencement of the bankruptcy case, including regular contributions to household expenses by non-debtors and including income from the spouse of the debtor if the petition is a joint petition, but not including social security earnings or certain payments made because the debtor is the victim of certain crimes. 11 U.S.C. § 101(10A).
  2. In North Carolina and Alabama, bankruptcy administrators carry out similar functions that U.S. trustees perform in the remaining forty-eight states. The bankruptcy administrator scheme is managed by the Administrative Office of the United States Courts, while the U.S. trustee program is handled by the Department of Justice. For the intention of this publication, references to U.S. trustees are also pertinent to bankruptcy administrators.
  3. Section 507 sets out 10 types of unsecured claims which, for public policy purposes, Congress gave preference to distribution over other unsecured claims.
  4. A $25 fee is charged for converting a case under chapter 13 to a case under chapter 7.

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