THE CHAPTER 13 PROCESS, FROM START TO FINISH
Chapter 13 bankruptcy is also known as “wage earner” bankruptcy because, in order to file for Chapter 13, you must have a reliable source of income that you can use to repay some portion of your debt.
When you file for Chapter 13 bankruptcy, you must propose a repayment plan that details how you are going to pay back your debts over the next three to five years. The minimum amount you will have to repay depends on how much you earn, how much you owe, and how much your unsecured creditors would have received if you had filed for Chapter 7 bankruptcy. Your bankruptcy attorney will help you work out this plan.
Your debts must be within limits set by the federal government: Currently, you may not have more than $1,081,400 in secured debt and $360,475 in unsecured debt.
If you have secured debts such as a mortgage or vehicle, Chapter 13 gives you an option to make up missed payments to avoid repossession or foreclosure. You can include these past due amounts in your repayment plan and make them up over time. If you have unsecured debts such as credit cards, medical bills, payday loans, etc Chapter 13 still allows for these debts to be wiped out. If you are facing garnishment, a Chapter 13 will stop such creditor actions.
HOW CHAPTER 13 WORKS
A chapter 13 case begins by filing nearly the exact same set of forms as in a Chapter 7 bankruptcy, though the filing fee is $281 rather than $306 in the case of a Chapter 7 case. In terms of documents to be filed, in a Chapter 13 you must file a Chapter 13 Plan as well as a slightly different form for the means test.
The key difference between a Chapter 7 and a Chapter 13 is that in the Chapter 13 you are restructuring your debts: you can stretch them out over a longer period of time, lower the monthly payments, pay some creditors in full, pay other creditors zero, or pay some of them just a percentage of their debt. You will make monthly payments to the trustee and he sends each creditor their share of the monthly payment. Your Chapter 13 payments to the trustee will always be less than the amount you were paying to your creditors before you filed. This is because the regular monthly payments have been lowered or extended over a longer period of time and because some of your debts will be wiped out and paid zero.
SPECIAL AUTOMATIC STAY RULES IN CHAPTER 13
Just like in a Chapter 7, filing the petition under Chapter 13 stops most collection actions against you or your property. Chapter 13 also contains a special automatic stay provision that protects co-debtors. Unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a consumer debt from any individual who co-signed or is liable on a debt along with the debtor.
THE MEETING OF CREDITORS IN CHAPTER 13
Between 21 and 50 days after you file your Chapter 13 petition, the Chapter 13 Trustee will hold a meeting of creditors. During this meeting, the trustee puts the debtor under oath, and both the trustee and creditors may ask questions. You must attend the meeting and answer questions regarding your financial affairs and property. If a husband and wife have filed a joint petition, they both must attend the creditors’ meeting and answer questions. It is important to cooperate with the trustee and to provide any financial records or documents that the trustee requests. Your attorney will appear with you at this meeting and help you through this procedure.
HOW CREDITORS GET PAID IN CHAPTER 13
In a Chapter 13 case, you will send a payment to the trustee each month and he will divide it among the creditors that you proposed to pay. In most cases your employer will be instructed to hold the payment out of your paycheck each pay period. Creditors must file a claim form with the court within 90 days after the first date set for the meeting of creditors. This form is called a Proof of Claim form and it sets out exactly what the creditor claims you owe. If a creditor does not file a claim in your Chapter 13, then that creditor will receive none of the money you put into your Plan. If the debt is dischargeable then it will simply be wiped out when your Chapter 13 case is finished.
THE CHAPTER 13 PLAN
Under Chapter 13, you must file a repayment plan with the bankruptcy petition or within 14 days after the petition is filed. The Plan is subject to court approval and must provide for payments of a fixed amount to the trustee each month. The Plan is how you tell the court and your creditors who you are going to pay and how much you will pay them. The trustee then distributes the money to your creditors each month according to the terms of the plan.
Your Plan does not need to pay all unsecured claims in full so long as it meets certain legal requirements. The length of the repayment plan, which is called the “applicable commitment period,” depends on the debtor’s current monthly income. The applicable commitment period ranges from thirty-six months to sixty months (3-5 years).
Within 30 days after filing the bankruptcy case, even if the plan has not yet been approved by the court, the debtor must start making plan payments to the trustee.
GETTING YOUR PROPOSED PLAN APPROVED
Within 45 days after the meeting of creditors, the bankruptcy judge must hold a hearing and decide whether or not to approve the plan. This is called the “confirmation hearing.” Some of your creditors may object to the approval of your plan. If that happens, your lawyer will work with you to make your Plan acceptable to the creditor. But if the creditors cannot be pleased, then it will be up to you and your lawyer to attend a hearing and let the judge decide.
Once the Plan is confirmed, the Chapter 13 trustee will start to distribute funds received.
MAKING THE PLAN WORK
Once the court approves the plan, it is up to you to make the plan succeed. You must make regular payments to the trustee, which will require an adjustment to living on a fixed budget for a prolonged period.
In addition, it is important to remember that you are not allowed to take on any new debt without consulting the trustee and without court approval.
If you do not make the payments due under the Plan, the court will dismiss the case. The court may also dismiss your case if you do not stay current on your domestic support obligations (child support or alimony), or you fail to file your required tax returns during the case.
Occasionally, a change in circumstances may cause you to get behind or leave you unable to make the plan payments. If that happens, no worries, as long as you contact your attorney, your Plan can be modified to make up the payments or they can be added to what you still owe.
THE CHAPTER 13 DISCHARGE
Once you have completed all payments under the Chapter 13 plan, you will be entitled to a discharge. The discharge in a Chapter 13 case is broader than in a Chapter 7 case, but some debts will not be discharged. Debts not discharged in Chapter 13 include long-term obligations like a home mortgage, debts for alimony or child support, certain taxes, debts for student loans, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine. If any of these debts are not fully paid under the Chapter 13 plan, you will still be responsible for these debts after the bankruptcy case is over.
THE CHAPTER 13 HARDSHIP DISCHARGE
After confirmation of a plan, many months or years down the road, circumstances may arise that prevent you from completing the plan. In such situations, you may ask the court to grant a hardship discharge.
Generally, such a discharge is available only if:
(1) your failure to complete plan payments is due to circumstances beyond your control and through no fault of your own;
(2) creditors have received at least as much as they would have received in a chapter 7 liquidation case; and
(3) modification of the plan is not possible.
The hardship discharge is more limited than the discharge described above and does not apply to any debts that are non-dischargeable in a Chapter 7 case.
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