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Background
Chapter 13 is available to individuals with regular income from any source, not just
wages. A sole proprietor is also eligible for chapter 13 relief. The goal is for
individuals to reorganize pay creditors though a plan requiring monthly payments for a
minimum of three years and no more than five years. Currently unsecured debts must be
$269,250, or less, and secured debts $807,750, or less, for an individual to qualify for
chapter 13. Corporations and partnerships may not file chapter 13.
An individual, even if self-employed in an unincorporated business, is eligible for
chapter 13 relief as long as the individual's unsecured debts are less than $269,250 and
secured debts are less than $807,750. Corporations and partnerships may not file chapter
13.
How Chapter 13 Works
A chapter 13 begins with a petition filed at the bankruptcy court where the debtor has a
domicile or residence. The debtor also files schedules of assets and liabilities, a
schedule of current income and expenditures, and a statement of financial affairs. A
husband and wife may file a joint petition or file individually. Joint petitioners pay
only one filing fee. If only one spouse files, the income and expenses of the non-filing
spouse must be included in the debtor's schedules.
The filing of the petition under chapter 13 "automatically stays" most actions
against the debtor or the debtor's property. As long as the "stay" is in effect,
creditors generally cannot initiate or continue any foreclosure, lawsuit, repossession, or
wage garnishment. Chapter 13 also provides a "co-debtor" stay which stops a
creditor from trying to collect a "consumer debt" from another individual who is
liable with the debtor on the debt. A consumer debt is an obligation incurred for
consumer, as opposed to business, needs.
A debtor facing foreclosure can stop the foreclosure sale by filing chapter 13. The
chapter 13 plan permits the debtor to cure defaults on mortgage debts by repaying the
arrears within a reasonable period of time [usually within 36 months]. If the mortgage
becomes all due during the chapter 13, the plan must pay off that entire debt by the due
date.
Upon the filing the petition, a trustee is appointed to administer the case. The chapter
13 trustee's role is to collect plan payments from debtors and make distributions to
creditors according to the debtor's plan. The debtor must file a plan within fifteen days
of the petition, unless extended by the court, and the debtor must begin making plan
payments to the trustee within 30 days of the petition date. The plan provides for monthly
payments of a fixed amount to the trustee and must ultimately be confirmed by the court.
Upon confirmation, the trustee begins distributing funds to creditors according to the
terms of the plan. A plan can offer unsecured creditors less than full payment of their
claims. Automobile loans can be modified so a debtor pays the lender only the value of the
car as of the date of the petition. The unsecured portion of the debt is treated like
all other unsecured debts in the plan.
A meeting of creditors is held in every case, and the debtor is examined under oath. The
meeting is held about 30 days after the petition is filed. The trustee conducts the
meeting and questions the debtor's financial affairs and the proposed terms of the plan.
Creditors may attend and ask questions. Debtors must attend, and if a husband and wife
filed jointly, they must both be present. Problems with the plan are typically resolved
during or shortly after the creditors' meeting. If there are no plan objections, a
confirmation order is submitted at the creditors meeting.
If the trustee or a creditor objects to confirmation of the plan, a hearing is scheduled
before the court. The bankruptcy judge will determine whether the plan is feasible and
meets the legal requirements for confirmation. A variety of objections may be made, but
the most frequent objections are: the total plan payments are less than creditors would
receive if the debtor's assets were liquidated; or the debtor's plan does not commit all
of the debtor's projected net disposable income for the minimum three-year period.
The debtor must commit all projected "disposable income" during the time the
plan is in effect. Disposable income is defined as income not reasonably necessary for the
maintenance or support of the debtor or dependents. If the debtor operates a business,
disposable income excludes those sums necessary to pay ordinary operating expenses.
If the plan is confirmed by the bankruptcy judge, the chapter 13 trustee begins
distributing the funds received according to the plan. If the plan is not confirmed, the
debtor may attempt to modify the plan. The debtor also has a right to convert the case to
a chapter 7.
Making The Plan Work
On occasion, changed circumstances will affect a debtor's ability to make plan payments,
or a debtor may have inadvertently omitted a creditor. In such instances, the plan may be
modified either before or after confirmation. Modification after confirmation is not
limited to a motion by the debtor. Modifications may be at the request of the trustee or
an unsecured creditor.
The provisions of a confirmed plan are binding on the debtor and each creditor. Once the
court confirms the plan, it is the responsibility of the debtor to make the plan succeed.
Chapter 13 is not designed to solve financial problems that arise after the case is filed.
The debtor must make regular payments to the trustee, which will require living on a fixed
budget for a long period.
The debtor's employer may be required to withhold the amount of the plan payment from the
debtor's paycheck and send it to the chapter 13 trustee. Furthermore, while confirmation
of the plan entitles the debtor to retain property, the debtor may not incur any
significant new debt without consulting the trustee, if such obligations have an impact
upon the execution of the plan. Failure to make plan payments may result in dismissal of
the case.
The Chapter 13 Discharge
The chapter 13 debtor is entitled to a discharge upon successful completion of all
payments. The discharge releases the debtor from all claims provided for in the plan or
disallowed by the court. It is the creditor's duty to file a claim in the case. Those
creditors who were provided for in full or in part under the chapter 13 plan, even if not
paid because they failed to file a claim, may not initiate or continue legal action to
collect the discharged obligations.
In return for adhering to the requirements of a repayment plan for three to five years,
the debtor receives a broader discharge under chapter 13 than in a chapter 7 case.
Generally, the debtor is discharged from all debts provided for by the plan or disallowed,
except certain long term obligations (such as a home mortgage), debts for alimony or child
support, debts for most student loans, 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. To the extent that these types of debts are not fully paid pursuant to
the chapter 13 plan, the debtor will still be responsible for these debts after the
chapter 13 case has successfully concluded.
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