Chapter 13 Bankruptcy

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Information About Chapter 13

What is Chapter 13 and how does it work?

Chapter 13 is that part (or Chapter) of the Bankruptcy Code that authorizes a person to repay all or a portion of their debts under the supervision and protection of the Bankruptcy Court. The Bankruptcy Code is that portion of the federal laws that deals with bankruptcy. In a Chapter 13 case, the debtor must submit to the court a plan for the repayment of all or a portion of his or her debts. The plan must be approved by the court to become effective. If the court approves the debtor’s plan, most creditors will be prohibited from collecting their claims from the debtor during the course of the case. The debtor must make regular payments to a person called the Chapter 13 trustee, who collects the money paid by the debtor and disburses it to creditors in the manner called for in the plan. Upon completion of the payments pursuant to the plan, the debtor is released from liability for the remainder of his or her dischargeable debts.

How does Chapter 13 differ from Chapter 7 for a debtor?

The basic difference between Chapter 7 and Chapter 13 is that under Chapter 7 the debtor’s nonexempt property (if any exists) is liquidated (sold) to pay as much as possible of the debtor’s debts, while in most Chapter 13 cases an individual may retain their nonexempt property and make payments on as much of the debtor’s debts as is feasible considering the debtor’s financial circumstances. In addition, a Chapter 13 discharge is broader than a Chapter 7 discharge and releases the debtor from liability for some debts that are not dischargeable under Chapter 7. However, a Chapter 13 case normally lasts much longer than a Chapter 7 case and is usually more expensive for the debtor.

When is Chapter 13 preferable to Chapter 7?

Chapter 13 is usually preferable for a person who (1) wishes to attempt to save their home from foreclosure, (2) wishes to repay some or all of their unsecured debts and has the income with which to do so within a reasonable time, (3) has valuable nonexempt property which would be lost in a Chapter 7 case, (4) is not eligible for a discharge under Chapter 7, (5) has one or more substantial debts that are dischargeable under Chapter 13 but not under Chapter 7 or (6) has sufficient assets with which to repay most debts, but needs temporary relief from creditors in order to do so.

How does Chapter 13 differ from a private debt consolidation service?

In a Chapter 13 case, the Bankruptcy Court can provide aid that private consolidation services cannot provide. For example, the court has the authority to prohibit creditors from attaching your assets, garnishing your wages or foreclosing on your residence, to force unsecured creditors to accept a Chapter 13 plan that pays only a portion of their claims, and to discharge a debtor from unpaid portions of debts. Private debt consolidation services have none of these powers.

What is a Chapter 13 discharge?

It is a court order releasing a debtor from all dischargeable debts and ordering creditors not to collect them from the debtor. A debt that is discharged is one that the debtor is released from and does not have to pay. There are two types of Chapter 13 discharges: (1) a full or successful plan discharge, which is granted to a debtor who completes all payments called for in the plan; and (2) a partial or unsuccessful plan discharge, which is granted to a debtor who is unable to complete the payments called for in the plan due to circumstances for which the debtor should not be held accountable. A full Chapter 13 discharge is broader and discharges more debts than a Chapter 7 discharge, while a partial Chapter 13 discharge is similar to a Chapter 7 discharge.

What types of debts are dischargeable under Chapter 13?

A full Chapter 13 discharge granted upon completion of all payments required in the plan relieves a debtor from all debts except:

• Debts that were paid outside of the plan and not covered in the plan;

• Debts for alimony, maintenance or support;

• Debts for death or personal injury caused by the debtor’s operation of a motor vehicle while intoxicated as per state law;

• Debts for restitution or criminal fines included in a criminal sentence imposed on the debtor;

• Debts for most student loans or educational obligations;

• Secured debts, secured by property being retained by the individual whose last payment is due after the completion of the plan; and

• Debts incurred while the plan was in effect that were not paid under the plan.

A partial Chapter 13 discharge granted when a debtor is unable to complete the payments under a plan due to circumstances for which the debtor should not be held accountable, discharges the debtor from all debts except those debts excepted from the full Chapter 13 discharge (listed above) and any debt not dischargeable under Chapter 7.

What is a Chapter 13 plan?

It is a written plan presented to the Bankruptcy Court that states how much money or another property the debtor will pay to the Chapter 13 trustee, how long the payments to the Chapter 13 trustee will continue, how much money will be paid to the creditors, which creditors will be paid outside of the plan and certain other technical matters.

What is a Chapter 13 trustee?

A Chapter 13 trustee is a person appointed by the United States Trustee Program to collect payments from the debtor, make payments to the creditors in the manner set forth in the plan and administer the Chapter 13 case until it is closed. In some cases, the Chapter 13 trustee is required to perform certain other duties, and the debtor is always required to cooperate with the trustee.

What debts may be paid under a Chapter 13 plan?

Any debts whatsoever, whether they are secured or unsecured. Even debts that are nondischargeable, such as student loans, alimony or child support, may be paid under a Chapter 13 plan.

Must all debts be paid in full under a Chapter 13 plan?

No. While priority debts, such as debts for alimony, maintenance and support, and most tax obligations must be paid in full under a Chapter 13 plan, the debtor is required to pay only that which he or she can reasonably afford on the general unsecured obligations. In addition, the debtor must make the regularly scheduled installment payments due on secured debts (such as mortgages and car loans). The unpaid balances of most debts that are not paid in full under a Chapter 13 plan are discharged upon completion of the plan.

Must all unsecured creditors be treated alike under a Chapter 13 plan?

No. If there is a reasonable basis for doing so, unsecured debts can be divided into separate classes and treated differently. It may be possible, therefore, to pay certain unsecured creditors in full, while paying little or nothing to others.

How much income must be paid to the Chapter 13 trustee under a Chapter 13 plan?

Usually all of the disposable income of the debtor and the debtor’s spouse for a three- to five-year period must be paid to the Chapter 13 trustee. Disposable income is defined as income received by the debtor and their spouse that is not reasonably necessary for the support of the debtor and debtor’s dependents. The debtor’s budget may include reasonable amounts for clothing, personal care and recreation. Generally, the Chapter 13 plan is required to provide a minimum of 10% to 20% payment for unsecured creditors.

When must the debtor begin making payments to the Chapter 13 trustee and how must they be made?

The debtor must begin making payments to the Chapter 13 trustee within 30 days after the plan is filed with the court, and the plan must be filed with the court within 15 days after the case is filed. The payments must be made regularly, usually on a monthly basis.

How long does a Chapter 13 plan last?

Except under extraordinary circumstances and with prior court approval, a Chapter 13 plan must last for three years, unless all debts can be paid off in full in less time. However, a Chapter 13 plan may last for as long as five years, if necessary, or required. No plan may exceed 60 months.

Is it necessary for all creditors to approve a Chapter 13 plan?

No. To become effective, a Chapter 13 plan must be approved by the court, not by the creditors. The court, however, cannot approve a plan unless secured creditors are dealt with in the manner described. Also, unsecured creditors are permitted to file objections to the plan, and these objections must be ruled on by the court before it can approve the Chapter 13 plan.

How are secured creditors dealt with under Chapter 13?

There are four methods of dealing with secured creditors under Chapter 13: (1) the creditor may accept the proposed plan, (2) the creditor may retain its lien and be paid the regular contractual payments due toward its secured claim under the plan, (3) the debtor may surrender the collateral to the creditor, or (4) the creditor may be paid or dealt with outside the plan. If the debtor is in default to a secured creditor, and would like to keep the secured property (such as a house or car) the default may be cured (made current) through the plan.

How are co-signed or guaranteed debts handled under Chapter 13?

Generally, while a Chapter 13 bankruptcy is pending, creditors are prohibited from collecting debts from a co-signer or guarantor unless court gives the creditor special permission to do so. After the bankruptcy is over, the creditor may attempt to collect the unpaid portion of the debt from the co-signer or guarantor.

Who is eligible to file under Chapter 13?

An individual or a married couple may file a Chapter 13 bankruptcy if the person (1) resides in, does business in or owns property in the United States; (2) has regular income; (3) has unsecured debts of less than $394,725; (4) has secured debts of less than $1,184,200; (5) is not a stockbroker or a commodity broker; and (6) has not been a debtor in another bankruptcy case that was dismissed within the last 180 days on certain technical grounds. A person meeting the above requirements may file under Chapter 13 regardless of when he or she last filed a bankruptcy case or received a bankruptcy discharge. Corporations, partnerships and limited liability companies may not file under Chapter 13.

May a married couple file jointly under Chapter 13?

A married couple may file jointly under Chapter 13 if each of them meets the requirements listed above, except that only one of them needs to have regular income and their combined debts must meet the debt limitations described above.

When should a married couple file jointly under Chapter 13?

If both spouses are liable for any significant debts, they should file jointly under Chapter 13, even if only one of them has income.

May a self-employed person file under Chapter 13?

Yes. A self-employed person meeting the eligibility requirements listed above may file under Chapter 13. A debtor engaged in business may continue to operate the business during the Chapter 13 case.

May a Chapter 7 case be converted to Chapter 13?

A pending Chapter 7 case may be converted to Chapter 13 at any time at the request of the debtor, if the case has not been previously converted to Chapter 7 from Chapter 13.

Where is a Chapter 13 case filed?

A Chapter 13 case is filed in the Bankruptcy Court in the district where the debtor has lived or maintained a principal place of business for the greatest portion of 180 days. The Bankruptcy Court is a unit of the Federal District Court. Maine’s Northern District is located in Bangor. The Southern District is located in Portland.

What fees are charged in a Chapter 13 case?

Legal fees usually run from $2,400 to 3,400. The bankruptcy lawyer generally requires an initial payment at the first meeting, followed by payment of the balance of the base fee prior to filing the petition. Any additional fees generated during the course of the case can be paid over time through the plan. There is a $310 filing fee charged when the case is filed. In addition, the Chapter 13 trustee assesses a fee of up to 10 percent on all payments made under the plan. Thus, if a debtor pays a total of $20,000 under a Chapter 13 plan, the trustee may keep $2,000 during the term of the plan.

Will a person lose any property if he or she files under Chapter 13?

Usually not. Under Chapter 13, creditors are usually paid out of the debtor’s income and not from the debtor’s property. However, if a debtor has valuable nonexempt property and has insufficient income to pay enough to creditors to satisfy the court, some of the debtor’s property may have to be sold in order to pay creditors.

How does filing under Chapter 13 affect collection proceedings and foreclosures previously filed against the debtor?

The filing of a Chapter 13 case automatically stays (stops) all lawsuits, attachments, garnishments, foreclosures and other actions by creditors against the debtor or the debtor’s property. A few days after the case is filed, the court will mail a notice to all creditors advising them of the automatic stay. Certain creditors may be notified sooner, if necessary. Most creditors are prohibited from proceeding against the debtor during the entire course of the Chapter 13 case. If the debtor is later granted a Chapter 13 discharge, the creditors will then be prohibited from collecting the discharged debts from the debtor after the case is closed. Note that pending child support and alimony/spousal support claims are not subject to the automatic stay.

May a person whose debts are being administered by a financial counselor file under Chapter 13?

Yes. A financial counselor has no legal right to prevent a person from filing any type of bankruptcy case, including a Chapter 13 case. The same is true of debt consolidation companies.

How does filing under Chapter 13 affect a person’s credit rating?

The effect is dependent upon the Individual’s credit rating immediately prior to filing bankruptcy. If it is high, filing a Chapter 13 may reduce it, at least temporarily. If it is already low before filing, a Chapter 13 may likely increase an Individual’s credit rating on a long-term basis. In addition, if most of a person’s debts are ultimately paid off under a Chapter 13 plan, that fact may be taken into account by credit reporting agencies. If very little is paid on most debts, the credit-rating effect of a Chapter 13 case may be similar to that of a Chapter 7 case. Under either scenario, most debtors will be able to re-establish credit after the bankruptcy is over.

Are the names of persons who file under Chapter 13 published?

When a Chapter 13 case is filed, it becomes a public record and the name of the debtor may be published by some credit reporting agencies. However, newspapers usually do not publish the names of persons who file under Chapter 13.

Is a person’s employer notified when he or she files under Chapter 13?

In most cases, no. A court may require a debtor’s employer to withhold money and to make payments to the Chapter 13 trustee on the debtor’s behalf. Also, the Chapter 13 trustee may contact an employer to verify the debtor’s income. This is not required and can usually be avoided with a bit of effort and coordination with the trustee.

Does a person lose any legal rights by filing under Chapter 13?

No. Filing under Chapter 13 is a civil proceeding and not a criminal proceeding. Therefore, a person does not lose any legal or constitutional rights by filing a Chapter 13 case.

May employers or government agencies discriminate against persons who file under Chapter 13?

No. It is illegal for either private or governmental employers to discriminate against a person as to employment because that person has filed under Chapter 13. It is also illegal for local, state or federal governmental agencies to discriminate against a person as to the granting of licenses, permits, student loans and similar grants because that person has filed under Chapter 13.

What is required for court approval of a Chapter 13 plan?

The court may confirm a Chapter 13 plan if (1) the plan complies with the legal requirements of Chapter 13; (2) all required fees, charges and deposits have been paid; (3) all priority claims will be paid in full under the plan; (4) the plan was proposed in good faith; (5) each unsecured creditor will receive under the plan at least as much as it would have received had the debtor filed under Chapter 7; (6) it appears the debtor will be able to make the required payments and comply with the plan; and (7) each secured creditor has been dealt with in the manner described above.

When does a debtor have to appear in court in a Chapter 13 case?

Most debtors do not have to appear in “court.” Every debtor must attend a hearing called a meeting of creditors. The meeting of creditors is held approximately a month after the case is filed and usually occurs in a relatively informal setting in front of the Chapter 13 trustee. No judge will be present. In all cases, a confirmation hearing will be held, but the debtor is usually not required to be present. If difficulties or unusual circumstances arise during the course of a case, additional court appearances may be necessary.

What if the court does not approve a debtor’s Chapter 13 plan?

If the court refuses to approve the plan proposed by a debtor, the debtor may modify the plan and seek court approval of the modified plan. If the court does not approve a plan, it will usually give its reasons for refusing to do so, and the plan may then be appropriately modified so as to become acceptable to the court. A debtor who does not wish to modify a proposed plan may either convert the case to Chapter 7 or dismiss the petition.

How are the claims of unsecured creditors handled under Chapter 13?

Unsecured creditors must file their claims with the Bankruptcy Court within 90 days after the first date set for the meeting of creditors in order for their claims to be allowed. Unsecured creditors who fail to file claims within that period are barred from doing so, and upon completion of the plan, their claims will be discharged. The debtor may file a claim on behalf of a creditor, if desired. After the claims have been filed, the debtor may file objections to any claims that he or she disputes. When the claims have been approved by the court, the Chapter 13 trustee begins paying unsecured creditors as provided for in the Chapter 13 plan. Payments to secured creditors, priority creditors and special classes of unsecured creditors may begin earlier, if desired.

What if the debtor is temporarily unable to make the Chapter 13 payments?

If the debtor is temporarily out of work, injured or otherwise unable to make the payments required under a Chapter 13 plan, the plan can usually be modified so as to enable the debtor to resume the payments when he or she is able to do so. If it appears that the inability to make the required payments will continue indefinitely or for an extended period, the case may be dismissed or converted to Chapter 7. The key is for the debtor to notify his or her attorney at the earliest possible opportunity and for the attorney to discuss options with the Chapter 13 trustee.

What if the debtor incurs new debts or needs credit during a Chapter 13 case?

Only a few types of credit obligations or debts incurred after the filing of the case may be included in a Chapter 13 plan. These are: (1) debts for taxes that become payable while the case is pending; (2) consumer debts arising after the filing of the case that are for property or services necessary for the performance under the plan and that are approved in advance by the Chapter 13 trustee and (3) debts for replacement vehicles so long as approved by the trustee. Most debts or credit obligations incurred after the case is filed must be paid outside the plan. Some courts issue an order prohibiting the debtor from incurring new debts during the case unless they are approved in advance by the Chapter 13 trustee. Therefore, the approval of the Chapter 13 trustee should be obtained before incurring credit or new debts after the case has been filed. The incurrence of regular debts, such as obligations for telephone services, heat and utilities, does not require the trustee’s approval.

What should the debtor do if he or she moves while the case is pending?

The debtor must immediately notify their lawyer, in writing, of the new address. It is the attorney’s responsibility to notify the Bankruptcy Court and the Chapter 13 trustee. Most communications in a Chapter 13 case are by mail, and if the debtor fails to receive an order of the court or a notice from the Chapter 13 trustee because of an incorrect address, the case may be dismissed.

What if the debtor later decides to discontinue the Chapter 13 case?

The debtor has the right to either dismiss a Chapter 13 case at any time or in many cases convert it to Chapter 7.

What happens if a debtor is unable to complete the Chapter 13 payments?

A debtor who is unable to complete the Chapter 13 payments has three options: (1) dismiss the Chapter 13 case; (2) convert the Chapter 13 case to Chapter 7; or (3) if the debtor is unable to complete the payments due to circumstances for which they should not be held accountable, close the case and obtain a partial Chapter 13 discharge as described in the answer to question 6 above.

What is the role of the debtor’s attorney in a Chapter 13 case?

•Examining the debtor’s financial situation and determining whether Chapter 13 is a feasible alternative, and if so, whether a single or a joint case should be filed;

•Assisting in the preparation of a budget;

•Examining the liens or security interests of secured creditors to ascertain their validity or avoidability, and taking the legal steps necessary to protect the debtor’s interest in such matter;

•Devising and implementing methods of dealing with secured creditors;

•Assisting in devising a Chapter 13 plan that meets the needs of the debtor and is acceptable to the court;

•Preparing the necessary pleadings and Chapter 13 forms;

•Filing the Chapter 13 forms and pleadings with the court and paying, or providing for the payment of the filing fee;

•Attending the meeting of creditors, the confirmation hearing and any other court hearings required in the case;

•Assisting the debtor in obtaining court approval of a Chapter 13 plan;

•Checking the claims filed in the case, filing objections to improper claims and attending court hearings thereon;

•Assisting the debtor in overcoming any legal obstacles that may arise during the course of the case;

•Assisting the debtor in obtaining a discharge upon the completion or termination of the plan.

The fee charged by an attorney for representing a debtor in a Chapter 13 case must be reviewed by the Bankruptcy Court. This rule is followed whether the fee is paid to the attorney prior to or after the filing of the case, and whether it is paid to the attorney directly or by the Chapter 13 trustee. The court will approve only a fee that it finds to be reasonable.

Information about required credit counseling and financial management courses

With limited exceptions, people who file for bankruptcy protection must receive credit counseling from a government-approved organization within six months before they file. They also must complete a financial management course to have their debts discharged. Only credit counseling organizations and financial management course providers that have been approved by the United States Trustee Program may provide the certificates of completion needed. A pre-bankruptcy counseling session will last approximately 90 minutes and will include an evaluation of your personal financial situation and a discussion of potential alternatives to bankruptcy. A financial management course will last approximately two hours and will include information on developing a budget, managing money, using credit wisely and other useful topics. We routinely use the same provider for both the credit counseling and the financial management course due to the exceptional job that they do. We will arrange the courses for you.

We are a debt relief agency. We help people file for bankruptcy relief under the U.S. Bankruptcy Code.