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What is Chapter 13 How Does it Work

What Is Chapter 13 And How Does It Work?

 

The lawyers at Donaldson & Norris, LLC, can assist you in understanding Chapter 13 bankruptcy and with preparing and filing a Chapter 13 bankruptcy petition, if appropriate.

Our experience, knowledge, and high level of personal attention are designed to provide you with quality legal representation and advice in an atmosphere in which you will feel comfortable.

 

The following frequently asked questions are intended to help guide you in your decision to seek relief under the Bankruptcy Code and provide you with some insight into Chapter 13 bankruptcy. Please contact an attorney at our office for a free confidential consultation to further discuss your options or with any questions. We are here for you.

 

Chapter 13 is that part (or chapter) of the Bankruptcy code under which a person may repay all or a portion of his or her debts under the supervision and protection of the bankruptcy court. The Bankruptcy Code is that portion of the federal laws that deal with bankruptcy. A person who files under chapter 13 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 during the course of the case. 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.

 

How Does Chapter 13 Differ From Chapter 7 For A Debtor?


The basic difference between chapter 7 and chapter 13 is that under 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 most chapter 13 cases a portion of the debtor’s future income is used to pay as much of the debtor’s debts as is feasible considering the debtor's circumstances. As a practical matter, under chapter 7 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. Under chapter 13, the debtor usually retains his or her nonexempt property, must pay off as much of his or her debts as the court deems feasible, and receives a chapter 13 discharge, which is broader than a chapter 7 discharge and releases the debtor from liability for several types of debts that are not dischargeable under chapter 7. However, a chapter 13 case normally lasts much longer than a chapter 7 case and is usually more expensive for the debtor.


When Is Chapter 13 Preferable To Chapter 7 For A Debtor?


Chapter 13 is usually preferable for a person who:

1. would like to save his or her home from foreclosure,

2. 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,

3. has valuable nonexempt property or has valuable exempt property securing debts, either of which would be lost in a chapter 7 case,

4. is not eligible for a discharge under chapter 7,

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 debts, but needs temporary relief from creditors in order to do so.

What Is A Chapter 13 Discharge?

It is a court order releasing a debtor from all dischargeable debts and ordering creditors not to collect them from the debtor. A debt that is discharged is one that the debtor is released from and does not have to pay.

What Types Of Debts May Not Be Dischargeable Under Chapter 13?

A full chapter 13 discharge must be granted upon the completion of all payments required in the plan and 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 alimony, maintenance, or support

3. debts for death or personal injury caused by the debtor’s unlawful operation of a motor vehicle while intoxicated,

4. debts for restitution or criminal fines included in a criminal sentence imposed on the debtor,

5. debts for most student loans or educational obligations that first became less than 7 years before the case was filed,

6. installment debts whose last payment is due after the completion of the plan, and

7. debts incurred while the plan was in effect that were not paid under the plan.

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 other property the debtor will pay to the chapter 13 trustee, how long the debtor’s payments to the chapter 13 trustee continue, how much will be paid to each of the debtor's creditors, which creditors will be paid outside of the plan and certain other technical matters.

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, and the debtor is always required to cooperate with the chapter 13 trustee.

What Debts May Be Paid Under A Chapter 13 Plan?

Any debts whatsoever, whether they are secured or unsecured. Even debts that are nondischargeable, such as debts for student loans, alimony or child support may be paid under a chapter 13 plan.

Must All Debts Be Paid In Full Under A Chapter 13 Plan?

No. While priority debts, such as debts for alimony, maintenance and support and debts for 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 completion of the plan.

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 three-to-five-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 reasonably necessary for the support of the debtor and the debtor’s dependents.

When Must The Debtor Begin Making Payments To The Chapter 13 Trustee And How Must They Be Made?

The debtor must begin making payments to the chapter 13 trustee within 30 days after the debtor’s plan is filed in the court, and the plan must be filed with the court within 15 days after the case is filed. The payments must be made regularly, usually on a monthly basis. If the debtor is employed, some courts require the payments to be made by the debtor’s employer, otherwise, the payments cm be made by either the debtor or the debtor's employer.

How Long Does A Chapter 13 Plan Last?

A chapter 13 plan must last for three years, unless all debts can be paid off in full in less time. However, a chapter 13 plan can last for as long as five years, if necessary.

How Are Secured Creditors Dealt With Under Chapter 13?

There are four methods of dealing with secured creditors under chapter 13:

1. The creditor may accept the debtor's proposed plan,

2. The creditor may retain its lien and be paid the full amount of its secured claim under the plan,

3. Debtor may surrender the collateral to the creditor, or

4. The creditor may be paid or dealt with outside of the plan.

It is important to understand that a creditor has a secured claim only to the extent of the value of its security, which cannot exceed the value of the property securing the claim. Thus, a creditor with a loan on, for example, a $1500 automobile, cannot have a secured claim for more than $1500 regardless of how much is owed to the creditor. If the debtor is in default to a secured creditor, the default must be cured (made current) within a reasonable time. Also, interest must be paid on secured claims.

How Are Cosigned Or Guaranteed Debts Handled Under Chapter 13?

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 guarantors. 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 guarantors 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.

Who Is Eligible To File Under Chapter 13?

Any natural person may file under chapter 13 if the person

1. resides in, does business in, or owns property in the United States,

2. has regular income,

3. has unsecured debts of less than $250,000,

4. has secured debts of less than $750,000,

5. is not a stockbroker or a commodity broker, and

A person meeting the above requirements may file under chapter 13 regardless of when he or she last filed a bankruptcy case or received a bankruptcy discharge. Corporations, partnerships and limited liability companies may not file under chapter 13.

May A Husband And Wife File Jointly Under Chapter 13?

A husband and wife may file jointly under chapter 13 if each of them meets the requirements listed in the answer to Question 18 above, except that only one of them need have regular income and their combined debts must meet the debt limitations described in the answer to Question 18 above.

When Should A Husband And Wife File Jointly Under Chapter 13?

If both spouses are liable for any significant debts, they should file jointly under chapter 13, even if only one of them has income.

May A Self-Employed Person File Under Chapter 13?

Yes. A self-employed person meeting the eligibility requirements listed above may file under chapter 13. A debtor engaged in business may continue to operate the business during the chapter 13 case.

What Fees Are Charged In A Chapter 13 Case?

There is a $310 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 10 percent on all payments made under the plan. Thus, if a debtor pays a total of $5,000 under a chapter 13 plan, the total amount of fees charged in the case will be $810 $500 trustee's fee, plus the $310 filing fee). These fees are in addition to the fee charged by the debtor’s attorney.

Will A Person Lose Any Property If He Or She Files Under Chapter 13?

Usually not under 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.

How Does Filing Under Chapter 13 Affect Collection Proceedings And Foreclosures Previously Filed Against The Debtor?

The filing of a chapter 13 case automatically stays (stops) all lawsuits, attachments, garnishments, foreclosures, and other actions by creditors against the debtor or the debtor’s property. 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 case. 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 dosed.

How Does Filing Under 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 credit-rating effect of a chapter 13 case may be similar to that of a chapter 7 case.

Are The Names Of Persons Who File Under Chapter 13 Published?

When a chapter 13 case is filed, it becomes a public record at the Bankruptcy Court. However, newspapers do not publish the names of persons who file under chapter 13.

Is A Person's Employer Notified When He Or She Files Under 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. 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.

Does A Person Lose Any Legal Rights By Filing Under Chapter 13?

No. Filing under 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 case.

May Employers Or Government Agencies Discriminate Against Persons Who File Under Chapter 13?

No. It is illegal for either private or governmental employers to discriminate against a person because that person has filed under 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 under chapter 13.

What Is Required For Court Approval Of The Chapter 13 Plan?

The court may confirm a chapter 13 plan if: (1) the plan complies with the legal requirements of chapter 13, (2) all required fees, charges, and deposits have been paid, (3) all priority claims will be paid in full under the plan, (4) the plan was proposed in good faith, (5) each unsecured creditor will receive, under the plan, at least as much as it would have received had the debtor filed under chapter 7, (6) it appears that the debtor will be able to make the required payments and comply with the plan, and (7) each secured creditor has been dealt with in the manner described in the answer to Question 16 above.

When Does A Debtor Have To Appear In Court In A Chapter 13 Case?

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 will be held at a later date. The debtor’s testimony should not be lengthy at either hearing, however. If difficulties or unusual circumstances arise during the course of a case, additional court appearances may be necessary.

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:

1. dismiss the chapter 13 case, or

2. convert the chapter 13 case to chapter 7.

What Is The Role Of The Filed Attorney In A Chapter 13 Case?

The Attorney performs the following functions in a typical chapter 13 case:

1. Examining the filed financial situation and determining whether chapter 13 is a feasible alternative for the debtor, and if so, whether a single or a joint case should be filed.

2. Assisting the debtor in the preparation of a budget

3. Examining the liens or security interests of secured creditors to ascertain their validity or avoidability, and taking the legal steps necessary to protect the filed interest in such matters.

4. Devising and implementing methods of dealing with secured creditors.

5. Assisting the debtor in devising a chapter 13 plan that meets the needs of the debtor and is acceptable to the court.

6. Preparing the necessary pleadings and chapter 13 forms.

7. Filing the chapter 13 forms and pleadings with the court and paying, or providing for the payment of, the filing fee.

8. Attending the meeting of creditors, the confirmation hearing, and any other court hearings required in the case.

9. Assisting the debtor in obtaining court approval of a chapter 13 plan.

10. Checking the claims filed in the case, filing objections to improper claims, and attending court hearings thereon.


11. Assisting the debtor in overcoming any legal obstacles that may arise during the course of the case.

 

What About Attorney Fees For Chapter 13 Bankruptcy Cases?

 

The fee charged by an attorney for representing a debtor in a Chapter 13 case must be reviewed and approved by the bankruptcy court. The court will only approve a fee that it finds to be reasonable.

 

 

 

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