Chapter 13 Bankruptcy

Chapter 13 bankruptcy is an option for individual debt adjustment under the U.S. Bankruptcy Code. Chapter 13 is a wage earner’s plan, which “enables individuals with regular income to develop a plan to repay all or part of their debts” (USCourts.gov, “Bankruptcy Basics PDF, p. 22,” 8/15/2013). Under chapter 13, the debtor proposes a repayment plan which allows for installments to be paid to creditors. When the debtor’s currently monthly income is less than the applicable state median, the plan will be for three years; however, the court reserves the right to approve a longer period. When the debtor’s current monthly income is greater than the applicable state median, the plan must be for five years. In this context, the plan cannot include payments that exceed five years. During the repayment period, “the law forbids creditors from starting or continuing collection efforts” (p. 22).

The greatest advantage of choosing chapter 13 over the other options is that with chapter 7, debtors can save their homes from foreclosure (p. 22). “By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time” (p. 22). Although chapter 13 stops foreclosure proceedings, debtors will still be required to “make all mortgage payments that come due during the chapter 13 plan on time” (p. 22).

Filing chapter 13 offers another advantage. This option allows debtors to reschedule secured debts (other than a mortgage of a primary residence) and extend the debts over the life of the plan. Extending the debt repayment period helps to lower the payments. The chapter 13 provision may also protect co-signers.

Lastly, chapter 13 acts similarly to a consolidation loan whereby the debtor makes the plan payments to the chapter 13 trustee. Individuals have no direct contact with their creditors.

An individual who may be self-employed or operating an unincorporated business is eligible to file for chapter 13 relief, provided secured debts do not exceed $360,475 and unsecured debts do not exceed $1,081,400. Amounts are adjusted periodically to reflect changes in the consumer price index (p. 22).

Individuals cannot file a chapter 13 bankruptcy if a bankruptcy petition was dismissed during the preceding 180 days and if the petition was dismissed as a result of the debtor’s willful failure to appear before the court and/or comply with orders. Debtors under chapter 13 must attend credit counseling and a debt management plan created during counseling must be filed with the court. Similar to a chapter 7 debtor, the chapter 13 debtor must also file a statement of financial affairs, evidence of income, list of property, list of creditors, and a list of monthly living expenses.

Filing a chapter 13 petition automatically stays collection efforts. Between 21 and 50 days the chapter 13 bankruptcy trustee will hold a meeting of the creditors. The debtor must attend the meeting and prepare to answer any questions related to owed debts as well as related to financial affairs. The debtor must file a repayment plan within 14 days of filing the petition and provide payments of fixed amounts to the trustee on a regular basis. Funds are then disbursed to each creditor according to the plan.

Funds are distributed by priority of claims. For example, there are three types of claims: priority, secured, and unsecured. A priority claim is granted special status by bankruptcy law; status is specific to taxes and the costs of bankruptcy. Secured claims are specific to the creditors’ right to take back property if the debtor fails to pay the underlying debt.

Lastly, unsecured claims are defined as those where the “creditor has no special rights to collect against particular property owned by the debtor” (p. 25). The repayment plan must allow for the fully repayment of all debts that fall under the priority claim. With regard to the treatment of secured claims, the debtor should consult an attorney (p. 25). “The plan need not pay unsecured claims in full as long as it provides that the debtor will pay all projected ‘disposable income’ over an ‘applicable commitment period’ and as long as unsecured creditors receive at least as much under the plan as they would receive if the debtor’s assets were liquidated under chapter 7” (p. 25).

The chapter 13 debtor is entitled to a discharge of debts under the plan once all payments are completed. The discharge releases the debtor from all debts referenced in the plan.