Chapter 13 - Background

Chapter 13 bankruptcy enables individuals with established income to enter into a payment plan to permit them to repay all or a portion of their debts that are not considered dischargeable. Because of this aspect it has also been referred to as a wage earner's bankruptcy. Under this chapter of the bankruptcy code, debtors put forth a plan to repay certain creditors over a period of three or five years. In a situation where the debtor's existing monthly income is lower than the state median, a three-year plan may be suggested, though the court may approve a five-year plan based on the debtor’s preference. Throughout the life of the chapter 13 plan you, the debtor, will remain under the protection of bankruptcy law which forbids creditors from opening or continuing any debt collection efforts.

Chapter 13 - Eligibility

Even if they are self-employed, an individual debtor may qualify for chapter 13 bankruptcy protection. A debtor who runs an unincorporated business may also qualify to file under chapter 13. To further qualify the debtors unsecured debts must be less than $365,000 while their secured debts total less than $1,081,400. Be aware that a corporation or partnership will not qualify for protection under chapter 13 of the bankruptcy code.

The following are certain specific reasons that an individual would not qualify to file for bankruptcy protection under any chapter of the code. If in the 180 days prior to filing the debtor has, (1) a prior bankruptcy case that was dismissed due to the debtor's willful failure to comply with orders of the court or appear before the court, or (2) their case was voluntarily dismissed by the debtor because creditors sought relief from the bankruptcy court to recover property for which they hold lawful rights.

Chapter 13 - How It Works

A chapter 13 bankruptcy case is opened when the debtor files documents n the bankruptcy court serving the area in which the debtor resides, including a petition, all required schedules and documents and pays the case filing fee. Once their case has been opened, a debtor should also be prepared to provide the chapter 13 trustee with a copy of their most recently filed tax return or transcript. During the life of the bankruptcy the debtor should also be prepared to provide any other tax returns filed during the life of the case, including all tax returns for prior years that had yet to be filed when the case was opened.

An independent Chapter 13 trustee is appointed to administer the case at the time that any chapter 13 petition is filed. In this role, the trustee is responsible for evaluating the case and acting as the disbursement agent for all monies processed as part of the bankruptcy. These actions include the collection of payments from the debtor each month as well as distributing payments to qualifying creditors. The act of filing the chapter 13 petition will automatically halt or "stay" most all collection activities against the debtor and their property. As long as the stay remains in effect, the majority of your creditors are prevented from initiating or continuing wage garnishments or lawsuits. They are even forbidden from contacting you to request payment. In response to the filing of the bankruptcy case, the clerk of the court will serve notice of the bankruptcy to all creditors that have been listed within the case.

Once a chapter 13 petition has been filed, the trustee will schedule a meeting of creditors to take place approximately 20 to 30 after the date of filing. This meeting, also commonly known as a 341 hearing, has the purpose of allowing the trustee and creditors the opportunity to ask questions of the debtor regarding their financial situation and verify the statements made in their petition while the debtor is under oath. All debtors regardless of the chapter under which the bankruptcy is filed are required to attend this hearing and to answer truthfully any questions asked of them. If married and filing bankruptcy jointly, both debtors are required to attend the meeting of creditors and answer any questions put before them. To safeguard the objectivity of their judgment, the judge for a bankruptcy case is not allowed to attend the meeting of creditors. It is important that the debtor is certain that all the information contained in their petition and schedules are accurate and complete. This is the most reliable way to avoid the discovery of issues at the creditors’ hearing. It is critical to the success of the case that the debtor maintain honest and thorough communication with your chosen attorney during the preparation of your petition, as well as during the preparation for your meeting of creditors. If a debtor is seeking to prevent the foreclosure of their home they can employ a chapter 13 proceeding to do so. The automatic stay that takes effect when the case is filed will prevent the foreclosure from proceeding. The chapter 13 plan payments can further aid the debtor by helping to bring the past-due payments up-to-date over the life of the chapter 13 plan. Debtors should be warned that if the mortgage company is able to complete the foreclosure sale or auction prior to the filing of the bankruptcy petition, the debtor is very unlikely to be able to save their home. If preventing is the foreclosure of your home is your primary goal, it is important to understand that in addition to filing for bankruptcy protection in a timely manner, it will be necessary that you be able to meet the monetary obligations of your regular mortgage in addition to the chapter 13 plan payments initiated once your case is filed.

Chapter 13 - Making the Plan Work

Once your chapter 13 plan has been confirmed by the bankruptcy court , the success or failure of the plan is chiefly in the debtor’s hands. It cannot be stated strongly enough that the debtors ability to make regular, timely payments to the trustee will determine the success or failure of a chapter 13 plan. Because of this, a debtor will not be allowed to incur any new debts during the life of the plan without the approval of the trustee,. This limitation helps to ensure that any additional debts will not endanger the debtor's ability to meet their obligations under the chapter 13 plan. Though the confirmation of the plan may entitle the debtor to retain specific assets, it does so only as long as the debtor is able to remain current in the payments for these assets. If the debtor should fail to meet the requirements of the plan by not making the scheduled payments to the plan by the date they are due each month, the court will move to dismiss the case. If the debtor’s circumstances change materially during the course of the chapter 13 bankruptcy such that the debtor can no longer meet the obligations of the plan, they may convert their case to a chapter 7 bankruptcy. In order to avoid unintended consequences and realize the greatest benefit, it is strongly recommended that the debtor discuss the implications of such a conversion with a knowledgeable bankruptcy attorney.

Chapter 13 - The Discharge

In order to fully appreciate the scope of the chapter 13 discharge available to you, it is strongly advised that debtors consult reliable legal counsel prior to filing.

Once the chapter 13 payment plan has been completed, and so long as certain specific additional requirements have also been met, the debtor will be granted a discharge of their debts. The debtor must also fulfill the following to be eligible for the discharge of the debts outlined in the chapter 13 plan; (1) debtor has not received a discharge in a prior case filed within the specified time frame of two years for prior chapter 13 cases and four years for prior chapter 7, 11 and 12 cases; (2) debtor has completed an approved course in financial management; and (3) if applicable, debtor certifies that all domestic support obligations that came due prior to making such certification have been paid. The court will file notice and hold a hearing if satisfied, the court will then enter the discharge if it has been determined that there is no reason to believe there is any pending circumstance that could incur a limitation on the debtor's homestead exemption.

A successfully completed chapter 13 bankruptcy discharges the specified debts owed by the debtor and frees them from further collection actions associated with all debts provided for within the plan or disallowed under the bankruptcy code, with the exception of specific types of debt. The following are some examples of forms of secured debt that are not discharged in a chapter 13: obligations for court-ordered maintenance such as alimony or child support, most taxes, most forms of government funded or guaranteed educational loans or benefit overpayments, obligations incurred through death or personal injury due to the debtor driving while intoxicated or under the influence, and restitution or a punitive fine included as part of a sentence in the debtor's conviction of a crime. To the degree that certain debts are not paid in full through the plan, the debtor should expect to continue to be responsible for these debts once the bankruptcy case has closed. The following types of debt will be discharged unless the creditor, in a timely manner, files and prevails in an action to have these debts declared nondischargeable; 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. In a chapter 13 case the discharge of debts available is somewhat broader than those available within a chapter 7 case. Debts not dischargeable in chapter 7 but dischargeable in a chapter 13 include, debts arising from property settlements in divorce or separation proceedings, debts for willful and malicious injury to property (as opposed to a person), and debts incurred to pay nondischargeable tax obligations.