Chapter 13 is a form of bankruptcy, available only to individuals with regular income, where the debtor repays all or part of their debts from future income.  To be eligible for Chapter 13, the debtor’s secured debt (mortgages, car loans and tax liens, etc.) must be less than $1,184,200 and unsecured debt must less than $394,725.  Absent court permission, creditors are barred from taking your property, foreclosing your home, or garnishing your wages while you are in Chapter 13.  Consumers with income that exceeds the Chapter 7 threshold, may obtain relief in Chapter 13.

BEFORE YOU FILE.  You must obtain credit counseling from an approved agency before you can file for bankruptcy.

WHY CHOOSE 13?  The Chapter 13 discharge eliminates some debts that cannot be discharged in Chapter 7 and provides the debtor with additional time to pay debts that cannot be discharged under either chapter.  Debts that cannot be discharged under either chapter include recent taxes or back child support. Chapter 13 also provides additional time to cure defaults on home mortgages and to eliminate liens on assets where the value the asset’s value is less than the amount owed.

            Debtors choose 13 when

• they owe debts not dischargeable in Chapter 7 (taxes, child support, marital property division)
• they have liens that are larger than the value of the assets securing the debt
• they are behind on car or house payments
• their assets are worth more than the available exemptions

WHO MAKES THE PLAN?   The debtor proposes a payment plan, based on the funds available after current living expenses are deducted.  The plan must meet two tests. First, the plan must give creditors at least as much on their claims as they would have obtained had the debtor filed Chapter 7. Second, all disposable income calculated by the formula in the Bankruptcy Code must be paid into the plan for at least 3 years.  Payments can be identical over the course of the plan, or they can start low and increase at intervals.  The plan must provide enough money to pay the priority claims (taxes and support) in full. It is possible for other creditors to obtain nothing.

ROLE OF THE TRUSTEE.  The Trustee is the disbursing agent for the payments made into the plan.  The Trustee also reviews the plan and challenges plans that fail to meet the tests for confirmable plans set out in the Bankruptcy Code.  Once the plan is confirmed (approved by the judge), the Trustee pays creditors regularly from the payments made by the debtor.  Generally, all debt existing at the beginning of the case must be paid though the Trustee. There are exceptions for current mortgage payments and for some leases.  If you stop making plan payments, however, the Trustee will ask that your case be dismissed.

PAYMENTS THROUGH THE PLAN.   The debtor must make the first payment on the plan within 30 days of the filing of the plan and each month thereafter.  Payments begin before the first meeting of creditors (the §341 meeting) and continue even while objections to confirmation are pending.  Payments must be made in certified funds, such as money orders or cashiers checks, or by voluntary wage deduction.

CAN CREDITORS OPPOSE THE PLAN?   Creditors’ objections are limited in Chapter 13.  They are unable to vote on whether they will accept the plan, as they are in Chapter 11.  They can object only if the plan does not meet the best interests of the creditors test and the best efforts test, or if they contend that the debtor has not proposed the plan in good faith.  The best interests of the creditors test requires that creditors obtain at least as much compensation as they would have obtained had the debtor instead filed Chapter 7.  The best efforts test requires that a debtor devote his monthly disposable income to the plan.

A secured creditor can also object to the value that the plan places on the creditors’ collateral.  (The Trustee can raise any objection that a creditor can raise.)  Objections to confirmation are usually resolved by a negotiation between the debtor’s counsel and the objecting party.  If the parties cannot reach a compromise, the judge will determine the outcome.

THE CONFIRMED PLAN.   Once the plan is confirmed it binds all parties: the creditors must accept the payments provided; the values given in the plan for the secured portion of claims are fixed; and the debtor’s payments over the life of the plan are fixed, unless the debtor’s circumstances change.

LIVING IN CHAPTER 13.   The restrictions on a debtor in Chapter 13 are few:

• make plan payments,
• do not incur significant new debt without court approval, and
• keep current insurance on any asset that is collateral for a debt.

If you have a house, you must make all payments that come due after the filing of the case.  These payments must be made directly to the lender or to the Chapter 13 trustee. Failure to pay can lead to dismissal of your case or to foreclosure.  The debtor may move or change jobs without restriction.   Court approval, however, is required prior to engaging in any of the following: acquiring a new car loan; incorporating a business that is an asset of the estate; or refinancing, selling or purchasing a home.  Obtaining court approval can take 30-45 days.

MODIFYING THE PLAN.   Plans can be altered if there is an interruption of income, through job loss or ill health.  Plan payments can be lowered, or the percentage paid to creditors adjusted, if the debtor’s income is unable to fund the plan as originally confirmed.  The modified plan must meet the same tests for plan confirmation.  Sometimes, the funds to be paid into a plan must be increased. This often occurs where the claims originally filed are greater than originally estimated.

THE COST OF CHAPTER 13.   Attorney’s fees in Chapter 13 are usually paid before the case is filed. The unpaid balances are paid by the Trustee from the payments the debtor makes into the plan.  If there are contests to confirmation, however, the final attorney’s fees may exceed the initially-determined fees.  The court will consider such requests for additional attorney’s fees. If the request is approved, the additional fees will be added to the debts paid through the plan.

THE DISCHARGE.   Discharge is the legal forgiveness of debts.  Debts are discharged when the plan is completed.  When the discharge is entered, no creditor who was listed in the bankruptcy can thereafter try to collect the debt (unless the debt is non-priority, nondischargeable, such as criminal restitution or student loans).  While the discharge stays on your credit record for 10 years from the discharge, it becomes increasingly insignificant in the decision to grant new credit with every year that passes.