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BANKRUPTCY UNDER CHAPTER 13 QUESTIONS AND ANSWERS ABOUT CHAPTER 13 BANKRUPTCY |
Disclaimer
This web site is designed for general information only. The information presented
at this site should not be construed to be formal legal advice nor the formation of
a lawyer/client relationship. Mark McClure is licensed to give legal advise in the
state of Washington only. ****ALERT**** THE FACTS BELOW MAY NOT BE
VALID AFTER OCTOBER 17, 2005. A MAJOR UPDATE WILL FOLLOW.
This web site is designed for general information only. The information presented
at this site should not be construed to be formal legal advice nor the formation of
a lawyer/client relationship. Mark McClure is licensed to give legal advise in the
state of Washington only. ****ALERT**** THE FACTS BELOW MAY NOT BE
VALID AFTER OCTOBER 17, 2005. A MAJOR UPDATE WILL FOLLOW.
| 1. What is Chapter 13 and how does it work? Chapter 13 is that part (or Chapter) of the Bankruptcy Code under which a person may repay all or a portion of his or her debt under the supervision and protection of the bankruptcy court. The Bankruptcy Code is that portion of the federal laws that deal with bankruptcy. A person who files under Chapter 13 is called a debtor. 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 directly from the debtor during the case. The debtor must take 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 called for in the plan, the debtor is released from liability for the remainder of his or her debts, except for long term debts (such as, mortgage loans) or nondischargeable debts (such as child support, alimony or students loans). 2. 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 to pay as much as possible of the debtor's debts, while in most Chapter 13 cases a portion of the debtor's future income is used to pay as much of the debtor's debts as is feasible considering the debtor's circumstances. As a practical matter, under Chapter 7 the debtor loses all or most of his or her nonexempt property and receives a Chapter 7 discharge, which releases the debtor from liability for most debts. Under Chapter 13, the debtor usually retains his or her non- exempt property, must pay off as much of his or her debts as the court deems feasible, and receives a Chapter 13 discharge, which is broader than a Chapter 7. However, a Chapter 13 case normally lasts much longer than a Chapter 7 case because of the time necessary for repayment of debts. A Chapter 13 case normally lasts from 3 years up to 5 years. 3. When is Chapter 13 preferable to Chapter 7 for a debtor? Chapter 13 is usually preferable for a person who- (1) wishes to repay all or most of his or her unsecured debts and has the income with which to do so within a reasonable time, (2) has valuable nonexempt property or has valuable exempt property securing debts, either of which would be lost in a Chapter 7 case, (3) is not eligible for a discharge under Chapter 7, having received a discharge under Chapter 7 during the previous 8 years, (4) has one or more substantial debts that are dischargeable under Chapter 13 but not under Chapter 7, or (5) has sufficient assets with which to repay most debts, but needs temporary relief from creditors to do so. 4. How does Chapter 13 differ from a private debt consolidation service? In a Chapter 13 case, the bankruptcy court can provide aid to the debtor that private debt consolidation services cannot provide. For example, the court has the authority to prohibit creditors from attaching or foreclosing on the debtor's property, 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. 5. 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 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 is similar to a Chapter 7 discharge. 6. What types of debts are dischargeable under Chapter 13? A full Chapter 13 discharge granted upon completion of all payments required in the plan discharges a debtor from all debts except:
7. 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:
7. What is a Chapter 13 plan? It is a written plan presented to the bankruptcy court by a debtor that states how much money or other property the debtor will pay to the Chapter 13 Trustee, how long the debtor's payments to the Chapter 13 Trustee will continue, how much will be paid to each of the debtor's creditors, which creditors will be paid outside of the plan, and certain other technical matters. 8. What is a Chapter 13 Trustee? A Chapter 13 Trustee is a person appointed by the United States Trustee to collect payments from the debtor, make payments to the creditors in the manner set forth in the debtor's plan, and administer the debtor's 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. 9. 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 debts for student loans. An exception to this is for alimony or child support. If the child support is current or arrangements have been made to pay any arrearage through a state court order, then the support will be paid outside the plan. 10. 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 debts for taxes, and fully secured debts must be paid in full under a Chapter 13 plan, only an amount that the debtor can reasonably afford must be paid on most other debts. The unpaid balances of most debts that are not paid in full under a Chapter 13 plan are discharged upon completion of the plan. 11. Must all unsecured creditors be treated alike under a Chapter 13 plan? Yes, except for cosigned debts where you received the money. If there is a reasonable basis for doing so, most cosigned debts can be treated differently. 12. How much of a debtor's 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 minimum of three years and a maximum of five years must be paid to the Chapter 13 Trustee. Disposable income is income received by the debtor and his or her spouse that is not reasonably necessary for the support of the debtor and the debtor's dependents. In some cases, your payments to the Trustee may have to exceed what would normally be your disposable income if you are contributing to a retirement plan, repaying a loan to your retirement plan, keeping an excess number of vehicles, keeping luxury items such as boats, campers, etc. Also, in cases where your plan proposes a less than 100% repayment of unsecured debt (credit cards, medical bills, personal loans, etc.), the Trustee will require a portion of your tax refund to be paid into your plan, in addition to your regular plan payment. 13. 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 AT THE LATEST within 30 days after the debtor's case is filed with the court. IF NO PAYMENTS ARE MADE WITHIN THIS 30 DAY PERIOD, THE TRUSTEE WILL CERTIFY YOUR CASE FOR DISMISSAL AND THE BANKRUPTCY COURT WILL DISMISS YOUR CASE WITHOUT A HEARING. In order to keep this from happening, we advise our clients to start payments within 2 to 3 weeks after the case is filed. The payments must be made regularly, usually on a weekly, bi-weekly, twice a month or monthly basis. If employed, the Trustee requires the payments to be made by the debtor's employer, through a payroll deduction. Normally, two to three payroll deductions will be made from your check before your court date. 14. How long does a Chapter 13 plan last? A Chapter 13 plan must last for three years (five years for households with above medium income, unless all debts can be paid off in less time. However, a Chapter 13 plan may last for as long as five years, if necessary. The length of your plan will be determined by what kind of debts you have, the amount of your debts and your budget. All of this information will be reviewed by the attorney in order to advise you about what length of plan will be best for your situation. 15. 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 creditors. The court, however cannot approve a plan unless all secured creditors are dealt with in the manner described in the answer to question 16 below. Also, unsecured creditors are permitted to file objections to the debtor's plan, and these objections must be ruled on by the court before it can approve the debtor's Chapter 13 plan. 16. How are secured creditors dealt with under Chapter 13? There are three methods of dealing with secured creditors under Chapter 13: 1. The creditor may accept the debtor's proposed plan. 2. The creditor may keep its lien and be paid the amount of its secured claim under the plan. 3. The debtor may surrender the property to the creditor in full satisfaction of the debt, if the creditor accepts this treatment, or may surrender the property and pay the amount not received by the creditor after sale of the property as an unsecured creditor under the plan. 17. How are cosigned or guaranteed debts handled under Chapter 13? This section will be updated. 18. Who is eligible to file under Chapter 13? Any natural person may file under Chapter 13 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 $290,525.00 *, (4) has secured debts of less than $871,550.00*, (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 companies may not file under Chapter 13. However, a discharge in a chapter 13 may not be granted if another discharge was received within 2 years of the filing of the present chapter 13. * These amounts are adjusted annually. The amounts shown here apply to cases filed on or after April 1, 2001. 19. May a husband and wife file jointly under Chapter 13? A husband and wife may file jointly under Chapter 13 if each of them meets the requirements listed in the answer to question 18 above, except that only one of them needs to have regular income and their combined debts must meet the debt limitations described in the answer to question 18 above. 20. Should a husband and wife 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. 21. May a self-employed person file under Chapter 13? Yes. A self-employed person meeting the eligibility requirements listed in the answer to question 18 above may file under Chapter 13. In most cases, a debtor engaged in business may continue to operate the business during the Chapter 13 case. 22. May a Chapter 7 case be converted to a Chapter 13? A pending Chapter 7 case may be converted to a 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. The same requirements for qualifying for a Chapter 13 would apply as if you were filing a Chapter 13 initially. 23. 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 the last 180 days. The bankruptcy court is a unit of the federal district court. The local clerk’s office for King County is located in Seattle, Washington; and, the local clerks office for Pierce County is located in Tacoma Washington. 24. What fees are charged in a Chapter 13 case? There is a $274.00 filing fee charged when the case is filed, which may be paid through payments made to the Trustee if necessary. In addition, the Chapter 13 Trustee collects a fee to help pay for the administrative costs of your plan. This fee is charged on all payments made under the plan, except for payments on first mortgages for your home. These fees are in addition to the legal fees charged by our office to represent you in the filing of your Chapter 13 case. Normally, the filing fee, Trustee's fee and legal fees are all paid out of the payments you make to the Trustee under your plan. This allows you to start your Chapter 13 case with no money down. If part of your filing fees and legal fees are to be paid up front, the attorney will discuss this with you. 25. 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 does not have sufficient income to pay enough to creditors to satisfy the court, some of the debtor's property may have to be sold by the debtor and used to pay creditors. 26. 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 creditor will then be prohibited from collecting the discharged debts from the debtor after the case is closed. The new law does make exceptions to this rule, especially if you had previously filed a bankruptcy in the last year. 27. May a person whose debts are being administer 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. 28. How does filing under Chapter 13 affect a person's credit rating? It may worsen it, at least temporarily. However, 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. Currently the filing of a Chapter 13 case remains on your credit for seven years from the date you file your case. If you complete your case and pay back a 100% dividend to unsecured creditors, this information will be submitted to the credit reporting agencies by the Chapter 13 Trustee upon completion of your case. 29. 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. Also, newspapers publish the names of persons who file under Chapter 13. 30. Is a person's employer notified when he or she files under Chapter 13? In most cases, yes. The Bankruptcy Court requires a debtor's employer to deduct the plan payments as a payroll deduction and forward the money to the Chapter 13 Trustee. Also, the Chapter 13 Trustee may contact an employer to verify the debtor's income. However, if there are compelling reasons for not informing an employer in a particular case, it may be possible to make other arrangements for the required information and payments. The exceptions granted from this requirement are extremely rare. 31. 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 unless they are convicted of bankruptcy fraud (which would be a crime) for not disclosing all of their property, debts and income or any other information requested by the Trustee or required by the court. 32. 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. 33. What is required for court approval of a Chapter 13 plan? The court may confirm (approve) 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 that 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 in the answer to question 16. 34. When does a debtor have to appear in court in a Chapter 13 case? Most debtors have to appear in court only once for a hearing called the meeting of creditors. If creditors file objections to your plan and these objections cannot be resolved, then some debtors may have to appear for a hearing on the confirmation of the debtor's Chapter 13 plan. The meeting of creditors is usually held about a month after the case is filed. The confirmation hearing, if necessary, will be held at a later date. The debtor's testimony should not be lengthy at either hearing, however. If difficulties or unusual circumstances arise during the course of a case, additional court appearances may be necessary. 35. What if the court does not approve a debtor's Chapter 13 plan? If the court will not 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, if the debtor qualifies to file a Chapter 7, or dismiss the case. 36. 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. 37. What if the debtor is temporarily unable to make Chapter 13 payments? If the debtor is temporarily out of work, injured, or otherwise unable to make payments required under a Chapter 13 plan, the plan can usually be modified so as to enable the debtor to resume the payments if he or she is able to do so within a reasonable time. If one of these situations arises in your case, please contact our office immediately. The sooner we are aware of a problem, the quicker we can take action to resolve the matter. If it appears that the debtor's inability to make the required payments will continue indefinitely or for an extended period, the case may be dismissed or converted to a Chapter 7, if the debtor qualifies. 38. What if the debtor incurs new debts or needs credit during a Chapter 13 case? Only two 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 and the taxing authority (IRS, TN Department of Revenue, County Property Tax Collector, etc.) allows the debt to be paid through the plan (in most cases the taxing authorities will not agree to this treatment and instead will file a motion to dismiss your case, so it is very important to pay all taxes as they come due after your case is filed) and (2) debts for services necessary for the debtor's performance under the plan and for which approval in advance by the Trustee is impractical, such as medical services, and the creditors for these debts agree to participate in the Plan. All other debts or credit obligations incurred after the case is filed must be paid by the debtor outside the plan. Our Trustee prohibits the debtor from purchasing anything on credit such as vehicle, home, appliances, etc 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 after the case has been filed. Incurring regular household debts, such as debts for telephone service and utilities, do not require the Trustee's approval. 39. What should the debtor do if he or she moves while the case is pending? The debtor should immediately notify our office in writing of the new address so we can notify the Chapter 13 Trustee and the court. 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. 40. What if the debtor later discontinues the Chapter 13 case? The debtor has the right to either dismiss a Chapter 13 case or convert it to a Chapter 7 at any time for any reason. However, if the debtor stops making the required payments, the Chapter 13 Trustee will file a motion with the court to dismiss the case. If this occurs and our office has not contacted you, you need to immediately contact our office to schedule an appointment to discuss the status of your case. 41. 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 a Chapter 7, or (3) if the debtor is unable to complete the payments due to circumstances for which he or she should not be held accountable, close the case and obtain a partial Chapter 13 discharge as described in question 6 above. 42. What if something happens during a Chapter 13 case that the debtor believes may affect his or her ability to complete the Chapter 13 payments? If anything happens during your Chapter 13 case that you think may affect your ability to complete the repayment of your debts as provided under your Chapter 13 case (such as loss of job, change in job, loss of income, separation, divorce, marriage, birth of child, etc.), please make an appointment to discuss with the attorney. The attorney’s work schedule and court schedule does not allow him time to provide legal advice over the telephone. If you are unable to meet with the attorney due to work or family schedule, address any concerns in writing and the attorney will provide a written response within seven (7) business days of receipt of your letter. If the case was filed as a joint case (both husband and wife), then it will be necessary to meet with both parties at the same time. Since the attorney represented both parties in the filing of the case it would be a conflict for the attorney to discuss any matters about the case with only one party. If both parties are unable to meet with the attorney at the same time due to work or family schedule, either or both parties may address any concerns about the case in writing and the attorney will provide a written response within seven (7) business days of receipt of your letter. The attorney will include a copy of the letter sent to the attorney with the response and will provide the response to both parties. If the parties are not able to meet with the attorney at the same time or not able to address their concerns in writing, it will become necessary for both parties to obtain their own separate legal counsel to proceed with their case. 43. What if the debtor has any other questions about your Chapter 13 case? If anytime during your Chapter 13 case you have questions about the case, please make an appointment to discuss with the attorney. The attorney’s work schedule and court schedule does not allow him time to provide legal advice over the telephone. If you are unable to meet with the attorney due to work or family schedule, please address any concerns in writing and the attorney will provide you a written response within seven (7) business days of receipt of your letter. If the case was filed as a joint case (both husband and wife), see the information in the second paragraph of question 42 above about how the attorney will have to proceed in discussing the status of the case with both parties. |
Chapter 13 Bankruptcy Facts
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