CHAPTER 13 BANKRUPTCY
Chapter 13 bankruptcy provides a means of relief for individuals struggling with debt who either may not qualify for Chapter 7 or whose circumstances might benefit from the additional relief provided under Chapter 13. It can be used by individuals to re-pay some or all of their debt over a reasonable period of time in order to protect assets that might be at risk in a Chapter 7 case or who might have too much income to qualify for Chapter 7. A bankruptcy case under Chapter 13 can also provide three or five years to repay income tax liabilities, catch up on past-due mortgage and car payments and/or provide temporary relief from student loans.
In Chapter 13, the Debtor files a Chapter 13 Plan with the Court which details the amount of the proposed monthly payments and period of time that they will be made for. Oftentimes, this will allow a Debtor to deal with issues that might be too complex for Chapter 7 while still discharging some or all of their unsecured debts, like credit cards or medical bills. Finally, Chapter 13 can also simply provide a guaranteed way for people who want or need to pay their debt back in full a set period of time with no interest or penalties, minimal fees and a structured payment plan with which to do so.
CHAPTER 13 TRUSTEE
Upon the filing of the bankruptcy petition, an impartial trustee is appointed by the U.S. Department of Justice to administer the case. A primary role of the chapter 13 trustee is to serve as a disbursing agent, collecting payments from debtors and making distributions to creditors
he date your petition is filed with the Bankruptcy Court under Chapter 13, an “automatic stay” goes into effect which forces all collection actions by creditors against you to stop immediately, including telephone calls, letters, starting or continuing lawsuits, wage garnishments and bank account freezes. Moreover, in a Chapter 13 this also includes stopping foreclosure proceedings or preventing the sale of a repossessed vehicles and forcing a creditor to return the car to you. This stay arises by operation of law immediately upon the filing of your case and requires no judicial action. Creditors normally receive notice of the filing of the petition from the clerk of the Bankruptcy Court within about a week after the case is submitted.
By virtue of the automatic stay, an individual debtor faced with a threatened foreclosure of the mortgage on his or her principal residence can prevent that foreclosure from going forward by filing a chapter 13 petition. Chapter 13 then affords the debtor a right to cure defaults on the mortgage by paying the arrears back over 36 or 60 months. The debtor is permitted to cure a default with respect to a lien on the debtor’s principal residence up until the completion of a foreclosure sale under state law.
CHAPTER 13 PLAN
A debtor filing Chapter 13 bankruptcy will usually also file a Chapter 13 plan of repayment with the petition or shortly thereafter. Chapter 13 plans, which must eventually be approved by the court at the Confirmation Hearing, provide for set monthly payments to the Chapter 13 Trustee who then distributes the funds to creditors according to the terms of the plan. A Chapter 13 Plan may provide creditors with anything from payment of the amount owed to less than 5% of the total debt. The debtor is obligated to pay all of his projected “disposable income” during the period of time in which the plan will be in effect. Disposable income is defined as income not reasonable necessary for the maintenance or support of the debtor or dependents.
The chapter 13 plan must also provide for the full payment of all debts entitled to priority under section 507 of the Bankruptcy Code, which most commonly are for income taxes or domestic support obligations. These debts can not be discharged under Chapter 7 either, so rather than having to deal with them after the fact and potentially still be facing collection activities, a Debtor may choose Chapter 13 to eliminate the debt by repaying it over a set period of time. The first payment under the plan is due within 30 days after the filing of the case, even if the Chapter 13 plan has not yet been approved by the court. If the case is confirmed, then these payments will be distributed to the creditors in accordance with the terms of the plan. If the case is dismissed or converted to Chapter 7, these payments will be returned to the Debtor.
MEETING OF CREDITORS
A “meeting of creditors” is usually held 20 to 40 days after the bankruptcy petition is filed with the Bankruptcy Court. The debtor must attend this meeting. The Chapter 13 trustee will also attend this meeting and question the debtor to confirm that the information listed in their petition is accurate.
It is important for the debtor to cooperate with the trustee and both be truthful and provide any documents that the trustee requests. Fortunately, in most cases, all of the questions and all of financial records sought, like income tax returns and pay stubs, are requested and reviewed by our attorneys before your bankruptcy case is even filed with the Court. The trustee is also required to examine the debtor at the meeting of creditors to ensure that the debtor is aware of the potential consequences of seeking a discharge in bankruptcy, including the effects on credit history, the ability to file a petition under a different chapter, the effect of receiving a discharge and the effect of reaffirming a debt. In order to preserve their independent judgment, bankruptcy judges are prohibited from attending the meeting of creditors.
Proof of Claims Deadline
In a chapter 13 case, unsecured creditors who have claims against the debtor must file a proof of claim with the court within 90 days after the first date set for the meeting of creditors. If a creditor fails to file a proof of claim and the Debtor completes the terms of a confirmed Chapter 13 Plan, that creditors debt will most often be discharged notwithstanding that no payments were actually made to them. A governmental unit, however, may file a proof of claim until the expiration of 180 days from the date the case is filed.
Between 30 and 60 days after the meeting of creditors is concluded, a confirmation hearing is held at the actual Bankruptcy Court where the bankruptcy judge will determine if the Chapter 13 plan is feasible and meets the standards for confirmation set forth in the Bankruptcy Code. Creditors, who will receive 25 days notice of a hearing, may appear and object to confirmation. While a variety of objections may be made, the most frequent ones are the payments offered under the plan are less than creditors would receive if the debtor’s assets were liquidate or that the debtor’s plan does not commit all disposable income for the three or five-year period of the plan.
Within 30 days after the filing of the plan, even if the plan has not yet been approved by the Court, the debtor must start making payments to the trustee. If the plan is confirmed by the bankruptcy judge, the chapter 13 trustee commences distribution of the funds received in accordance with the plan “as soon as practicable.” If the plan is not confirmed, the debtor has a right to file a modified plan. The debtor also has a right to convert the case to chapter 7. If the plan or modified plan is not confirmed and the case is dismissed, the court may authorize the trustee to retain a specified amount for costs, but all other funds paid to the trustee are returned to the debtor.
On occasion, changed circumstances will affect a debtor’s ability to make plan payment, a creditor may object or threaten to object to a plan, or a debtor may inadvertently have failed to list all creditors. In such instances, the plan may be modified either before or after confirmation . Modification after confirmation is not limited to an initiative by the debtor but may be at the request of the trustee or an unsecured creditor.
THE CHAPTER 13 DISCHARGE
The bankruptcy law regarding the scope of the chapter 13 discharge is complex and has recently undergone major changes. Therefore, debtors should consult competent legal counsel prior to filing regarding the scope of the chapter 13 discharge.
The chapter 13 debtor is entitled to a discharge upon successful completion of all payments under the chapter 13 plan. The discharge has the effect of releasing the debtor from all debts provided for by the plan or disallowed (under section 502), with limited exceptions. Those creditors who were provided for in full or in part under the chapter 13 plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.
In return for the willingness of the chapter 13 debtor to undergo the discipline of a repayment plan for three to five years, a broader discharge is available under the chapter 13 than in a chapter 7 case. As a general rule, the debtor is discharged from all debts provided for