Chapter 13
Individual Debt Adjustment
Chapter 13 allows a debtor to keep
property and pay debts over time, usually three to five years.
Background
A
chapter 13 bankruptcy is also called a wage earner's plan. It enables
individuals with regular income to develop a plan to repay all or part
of their debts. Under this chapter, debtors propose a repayment plan to
make installments to creditors over three to five years. If the
debtor's current monthly income is less than the applicable state
median, the plan will be for three years unless the court approves a
longer period "for cause." (1)
If the debtor's current monthly income is greater than the applicable
state median, the plan generally must be for five years. In no case may
a plan provide for payments over a period longer than five years. 11
U.S.C. §1322(d). During this time the law forbids creditors from
starting or continuing collection efforts.
This
chapter discusses six aspects of a chapter 13 proceeding: the
advantages of choosing chapter 13, the chapter 13 eligibility
requirements, how a chapter 13 proceeding works, what may be included
in chapter 13 repayment plan and how it is confirmed, making the plan
work, and the special chapter 13 discharge.
Advantages of Chapter 13
Chapter
13 offers individuals a number of advantages over liquidation under
chapter 7. Perhaps most significantly, chapter 13 offers individuals an
opportunity to save their homes from foreclosure. By filing under this
chapter, individuals can stop foreclosure proceedings and may cure
delinquent mortgage payments over time. Nevertheless, they must still
make all mortgage payments that come due during the chapter 13 plan on
time. Another advantage of chapter 13 is that it allows individuals to
reschedule secured debts (other than a mortgage for their primary
residence) and extend them over the life of the chapter 13 plan. Doing
this may lower the payments. Chapter 13 also has a special provision
that protects third parties who are liable with the debtor on "consumer
debts." This provision may protect co-signers. Finally, chapter 13 acts
like a consolidation loan under which the individual makes the plan
payments to a chapter 13 trustee who then distributes payments to
creditors. Individuals will have no direct contact with creditors while
under chapter 13 protection.
Chapter 13 Eligibility
Any
individual, even if self-employed or operating an unincorporated
business, is eligible for chapter 13 relief as long as the individual's
unsecured debts are less than $336,900 and secured debts are less than
$1,010,650. 11 U.S.C. § 109(e). These amounts are adjusted periodically
to reflect changes in the consumer price index. A corporation or
partnership may not be a chapter 13 debtor. Id.
An
individual cannot file under chapter 13 or any other chapter if, during
the preceding 180 days, a prior bankruptcy petition was dismissed due
to the debtor's willful failure to appear before the court or comply
with orders of the court or was voluntarily dismissed after creditors
sought relief from the bankruptcy court to recover property upon which
they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e). In addition, no
individual may be a debtor under chapter 13 or any chapter of the
Bankruptcy Code unless he or she has, within 180 days before filing,
received credit counseling from an approved credit counseling agency
either in an individual or group briefing. 11 U.S.C. §§ 109, 111. There
are exceptions in emergency situations or where the U.S. trustee (or
bankruptcy administrator) has determined that there are insufficient
approved agencies to provide the required counseling. If a debt
management plan is developed during required credit counseling, it must
be filed with the court.
How Chapter 13 Works
A
chapter 13 case begins by filing a petition with the bankruptcy court
serving the area where the debtor has a domicile or residence. Unless
the court orders otherwise, the debtor must also file with the court:
(1) schedules of assets and liabilities; (2) a schedule of current
income and expenditures; (3) a schedule of executory contracts and
unexpired leases; and (4) a statement of financial affairs. Fed. R.
Bankr. P. 1007(b). The debtor must also file a certificate of credit
counseling and a copy of any debt repayment plan developed through
credit counseling; evidence of payment from employers, if any, received
60 days before filing; a statement of monthly net income and any
anticipated increase in income or expenses after filing; and a record
of any interest the debtor has in federal or state qualified education
or tuition accounts. 11 U.S.C. § 521. The debtor must provide the
chapter 13 case trustee with a copy of the tax return or transcripts
for the most recent tax year as well as tax returns filed during the
case (including tax returns for prior years that had not been filed
when the case began). Id. A husband and wife may file a joint
petition or individual petitions. 11 U.S.C. § 302(a). (The Official
Forms may be purchased at legal stationery stores or downloaded from
the Internet at www.uscourts.gov/bkforms/index.html. They are not available from the court.) The
courts must charge a $235 case filing fee and a $39 miscellaneous
administrative fee. Normally the fees must be paid to the clerk of the
court upon filing. With the court's permission, however, they may 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
installments is limited to four, and the debtor must make the final
installment no later than 120 days after filing the petition. Fed. R.
Bankr. P. 1006(b). For cause shown, the court may extend the time of
any installment, as long as the last installment is paid no later than
180 days after filing the petition. Id. The debtor may also
pay the $39 administrative fee in installments. If a joint petition is
filed, only one filing fee and one administrative fee are charged.
Debtors should be aware that failure to pay these fees may result in
dismissal of the case. 11 U.S.C. § 1307(c)(2).
In
order to complete the Official Bankruptcy Forms that make up the
petition, statement of financial affairs, and schedules, the debtor
must compile the following information:
Married
individuals must gather this information for their spouse regardless of
whether they are filing a joint petition, separate individual
petitions, or even if only one spouse is filing. In a situation where
only one spouse files, the income and expenses of the non-filing spouse
is required so that the court, the trustee and creditors can evaluate
the household's financial position.
When
an individual files a chapter 13 petition, an impartial trustee is
appointed to administer the case. 11 U.S.C. § 1302. In some districts,
the U.S. trustee or bankruptcy administrator (2)
appoints a standing trustee to serve in all chapter 13 cases. 28 U.S.C.
§ 586(b). The chapter 13 trustee both evaluates the case and serves as
a disbursing agent, collecting payments from the debtor and making
distributions to creditors. 11 U.S.C. § 1302(b). Filing
the petition under chapter 13 "automatically stays" (stops) most
collection actions against the debtor or the debtor's property. 11
U.S.C. § 362. Filing the petition does not, however, stay certain types
of actions listed under 11 U.S.C. § 362(b), and the stay may be
effective only for a short time in some situations. The stay arises by
operation of law and requires no judicial action. As long as the stay
is in effect, creditors generally may not initiate or continue
lawsuits, wage garnishments, or even make telephone calls demanding
payments. The bankruptcy clerk gives notice of the bankruptcy case to
all creditors whose names and addresses are provided by the debtor.
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 is liable along with the debtor. 11 U.S.C. § 1301(a). Consumer
debts are those incurred by an individual primarily for a personal,
family, or household purpose. 11 U.S.C. § 101(8).
Individuals
may use a chapter 13 proceeding to save their home from foreclosure.
The automatic stay stops the foreclosure proceeding as soon as the
individual files the chapter 13 petition. The individual may then bring
the past-due payments current over a reasonable period of time.
Nevertheless, the debtor may still lose the home if the mortgage
company completes the foreclosure sale under state law before the
debtor files the petition.11 U.S.C. § 1322(c). The debtor may also lose
the home if he or she fails to make the regular mortgage payments that
come due after the chapter 13 filing.
Between
20 and 50 days after the debtor files the chapter 13 petition, the
chapter 13 trustee will hold a meeting of creditors. If the U.S.
trustee or bankruptcy administrator schedules the meeting at a place
that does not have regular U.S. trustee or bankruptcy administrator
staffing, the meeting may be held no more than 60 days after the debtor
files. Fed. R. Bankr. P. 2003(a). During this meeting, the trustee
places the debtor under oath, and both the trustee and creditors may
ask questions. The debtor must attend the meeting and answer questions
regarding 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, they
both must attend the creditors' meeting and answer questions. In order
to preserve their independent judgment, bankruptcy judges are
prohibited from attending the creditors' meeting. 11 U.S.C. § 341(c).
The parties typically resolve problems with the plan either during or
shortly after the creditors' meeting. Generally, the debtor can avoid
problems by making sure that the petition and plan are complete and
accurate, and by consulting with the trustee prior to the meeting.
In
a chapter 13 case, to participate in distributions from the bankruptcy
estate, unsecured creditors must file their claims with the court
within 90 days after the first date set for the meeting of creditors.
Fed. R. Bankr. P. 3002(c). A governmental unit, however, has 180 days
from the date the case is filed file a proof of claim.11 U.S.C. §
502(b)(9).
After the meeting
of creditors, the debtor, the chapter 13 trustee, and those 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 15 days after the petition is filed. Fed.
R. Bankr. P. 3015. A plan must be submitted for court approval and must
provide for payments of fixed amounts to the trustee on a regular
basis, typically biweekly or monthly. The trustee then distributes the
funds to creditors according to the terms of the plan, which may offer
creditors less than full payment on their claims.
There
are three types of claims: priority, secured, and unsecured. Priority
claims are those granted special status by the bankruptcy law, such as
most taxes and the costs of bankruptcy proceeding. (3) Secured claims are those for which the creditor has the right take back certain property (i.e.,
the collateral) if the debtor does not pay the underlying debt. In
contrast to secured claims, unsecured claims are generally those for
which the creditor has no special rights to collect against particular
property owned by the debtor. The
plan must pay priority claims in full unless a particular priority
creditor agrees to different treatment of the claim or, in the case of
a domestic support obligation, unless the debtor contributes all
"disposable income" - discussed below - to a five-year plan.11 U.S.C. §
1322(a).
If the debtor wants
to keep the collateral securing a particular claim, the plan must
provide that the holder of the secured claim receive at least the value
of the collateral. If the obligation underlying the secured claim was
used the buy the collateral (e.g., a car loan), and the debt was
incurred within certain time frames before the bankruptcy filing, the
plan must provide for full payment of the debt, not just the value of
the collateral (which may be less due to depreciation). Payments to
certain secured creditors (i.e., the home mortgage lender),
may be made over the original loan repayment schedule (which may be
longer than the plan) so long as any arrearage is made up during the
plan. The debtor should consult an attorney to determine the proper
treatment of secured claims in the plan.
The
plan need not pay unsecured claims in full as long 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. 11 U.S.C. § 1325. In chapter 13,
"disposable income" is income (other than child support payments
received by the debtor) less amounts reasonably necessary for the
maintenance or support of the debtor or dependents and less charitable
contributions up to 15% of the debtor's gross income. If the debtor
operates a business, the definition of disposable income excludes those
amounts which are necessary for ordinary operating expenses. 11 U.S.C.
§ 1325(b)(2)(A) and (B). The "applicable commitment period" depends on
the debtor's current monthly income. The applicable commitment period
must be three years if 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 a family of the same size. 11 U.S.C. §
1325(d). The plan may be less than the applicable commitment period
(three or five years) only if unsecured debt is paid in full over a
shorter period.
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. 11 U.S.C. § 1326(a)(1). If any secured loan payments or
lease payments come due before the debtor's plan is confirmed
(typically home and automobile payments), the debtor must make adequate
protection payments directly to the secured lender or lessor -
deducting the amount paid from the amount that would otherwise be paid
to the trustee. Id.
No
later than 45 days after the meeting of creditors, the bankruptcy judge
must hold a confirmation hearing and decide whether the plan is
feasible and meets the standards for confirmation set forth in the
Bankruptcy Code. 11 U.S.C. §§ 1324, 1325. Creditors will receive 25
days' notice of the hearing and may object to confirmation. Fed. R.
Bankr. P. 2002(b). While a variety of objections may be made, the most
frequent ones are that payments offered under the plan are less than
creditors would receive if the debtor's assets were liquidated or that
the debtor's plan does not commit all of the debtor's projected
disposable income for the three or five year applicable commitment
period.
If the court confirms
the plan, the chapter 13 trustee will distribute funds received under
the plan "as soon as is practicable." 11 U.S.C. § 1326(a)(2). If the
court declines to confirm the plan, the debtor may file a modified
plan. 11 U.S.C. § 1323. The debtor may also convert the case to a
liquidation case under chapter 7. (4)
11 U.S.C. § 1307(a). If the court declines to confirm the plan or the
modified plan and instead dismisses the case, the court may authorize
the trustee to keep some funds for costs, but the trustee must return
all 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 may compromise the debtor's ability to make
plan payments. For example, a creditor may object or threaten to object
to a plan, or the debtor may inadvertently have failed to list all
creditors. In such instances, the plan may be modified either before or
after confirmation. 11 U.S.C. §§ 1323, 1329. 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. 11 U.S.C. §
1329(a).
Making the Plan Work
The
provisions of a confirmed plan bind the debtor and each creditor. 11
U.S.C. § 1327. Once the court confirms the plan, the debtor must make
the plan succeed. The debtor must make regular payments to the trustee
either directly or through payroll deduction, which will require
adjustment to living on a fixed budget for a prolonged period.
Furthermore, while confirmation of the plan entitles the debtor to
retain property as long as payments are made, the debtor may not incur
new debt without consulting the trustee, because additional debt may
compromise the debtor's ability to complete the plan. 11 U.S.C. §§
1305(c), 1322(a)(1), 1327.
A
debtor may make plan payments through payroll deductions. This practice
increases the likelihood that payments will be made on time and that
the debtor will complete the plan. In any event, if the debtor fails to
make the payments due under the confirmed plan, the court may dismiss
the case or convert it to a liquidation case under chapter 7 of the
Bankruptcy Code. 11 U.S.C. § 1307(c). The court may 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 required tax filings during the case. 11 U.S.C. §§ 1307(c) and (e), 1308, 521.
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.
A
chapter 13 debtor is entitled to a discharge upon completion of all
payments under the chapter 13 plan so long as the debtor: (1) certifies
(if applicable) that all domestic support obligations that came due
prior to making such certification have been paid; (2) has not received
a discharge in a prior case filed within a certain time frame (two
years for prior chapter 13 cases and four years for prior chapter 7, 11
and 12 cases); and (3) has completed an approved course in financial
management (if the U.S. trustee or bankruptcy administrator for the
debtor's district has determined that such courses are available to the
debtor). 11 U.S.C. § 1328. The court will not enter the discharge,
however, until it determines, after notice and a hearing, that there is
no reason to believe there is any pending proceeding that might give
rise to a limitation on the debtor's homestead exemption. 11 U.S.C. §
1328(h).
The discharge
releases the debtor from all debts provided for by the plan or
disallowed (under section 502), with limited exceptions. Creditors
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.
As
a general rule, the discharge releases the debtor from all debts
provided for by the plan or disallowed, with the exception of certain
debts referenced in 11 U.S.C. § 1328. Debts not discharged in chapter
13 include certain long term obligations (such as a home mortgage),
debts for alimony or child support, certain taxes, debts for most
government funded or guaranteed educational loans or benefit
overpayments, 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 included in a sentence on the
debtor's conviction of a crime. To the extent that they are not fully
paid under the chapter 13 plan, the debtor will still be responsible
for these debts after the bankruptcy case has concluded. Debts for
money or property obtained by false pretenses, debts for fraud or
defalcation while acting in a fiduciary capacity, and debts for
restitution or damages awarded in a civil case for willful or malicious
actions by the debtor that cause personal injury or death to a person
will be discharged unless a creditor timely files and prevails in an
action to have such debts declared nondischargeable. 11 U.S.C. §§ 1328,
523(c); Fed. R. Bankr. P. 4007(c).
The
discharge in a chapter 13 case is somewhat broader than in a chapter 7
case. Debts dischargeable in a chapter 13, but not in chapter 7,
include debts for willful and malicious injury to property (as opposed
to a person), debts incurred to pay nondischargeable tax obligations,
and debts arising from property settlements in divorce or separation
proceedings. 11 U.S.C. § 1328(a).
The Chapter 13 Hardship Discharge
After
confirmation of a plan, circumstances may arise that prevent the debtor
from completing the plan. In such situations, the debtor may ask the
court to grant a "hardship discharge." 11 U.S.C. § 1328(b). Generally,
such a discharge is available only if: (1) the debtor's failure to
complete plan payments is due to circumstances beyond the debtor's
control and through no fault of the debtor; (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. Injury or
illness that precludes employment sufficient to fund even a modified
plan may serve as the basis for a hardship discharge. The hardship
discharge is more limited than the discharge described above and does
not apply to any debts that are nondischargeable in a chapter 7 case.
11 U.S.C. § 523.
