Chapter 13 is designed for individuals with regular income who want to pay their debts but are unable to do so in a timely manner. The purpose of Chapter 13 is to enable financially distressed individual debtors to propose and carry out a repayment plan under which creditors are paid over an extended period of time.
Under this chapter, debtors are permitted to repay creditors, in full or in part, in installments over a three- to five-year period, during which time creditors are prohibited from starting or continuing collection efforts. A plan providing for payments over more than three years must be for cause (a reason) and must be approved by the court. In no case may a plan provide for payments over a period longer than five years.
Any individual, even if self-employed or operating an unincorporated business, is eligible for Chapter 13 relief. Eligibility is contingent on the fact that the individual’s unsecured and secured debts are between certain dollar amounts that are adjusted annually by statute. A corporation or partnership may not be a Chapter 13 debtor.
How Chapter 13 Works
A Chapter 13 case begins when a debtor files a petition with the bankruptcy court serving the area where the debtor has a residence. Unless the court orders otherwise, the debtor also shall file the following documents with the court: (1) schedules (lists) of assets and liabilities; (2) a schedule of current income and expenditures; (3) a schedule of unfulfilled contracts and unexpired leases; and (4) a statement of financial affairs.
To complete the petition, statement of financial affairs, and schedules, the debtor needs to compile certain information, including the following:
1. A list of all creditors and the amounts and nature of their claims;
2. The source, amount, and frequency of the debtor’s income;
3. A list of all of the debtor’s property; and
4. A detailed list of the debtor’s monthly living expenses, that is, food, clothing, shelter, utilities, taxes, transportation, medicine, and so on.
Upon the filing of the petition, an impartial trustee is appointed to administer the case. The primary role of the Chapter 13 trustee is to serve as a disbursing agent, collecting payments from debtors due under the plan and, in turn, distributing these payments to creditors.
Furthermore, Chapter 13 contains a special automatic stay provision applicable to creditors. Specifically, after the commencement of a Chapter 13 case, unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a consumer debt from any individual who is liable with the debtor (that is, a cosigner on a note). Consumer debts are those incurred for consumer, as opposed to business, needs. The debtor must file a plan of repayment with the petition or within 15 days thereafter, unless extended by the court for cause. The Chapter 13 plan must, among other things, provide for the debtor to contribute that portion of his or her future income as is necessary to meet the terms of the plan.
Plans, which must be approved by the court, provide for payments of fixed amounts to the trustee on a regular basis, typically biweekly or monthly. The trustee then distributes the funds to creditors according to the terms of the plan, which typically offers creditors less than full payment on their claims.
The debtor must make regular payments to the trustee, which requires adjustment to living on a fixed budget for a prolonged period. Alternatively, a debtor may consent to the deduction of the plan payments, from the debtor’s paycheck, to be sent directly to the Chapter 13 trustee. Experience has shown that this practice increases the likelihood that payments will be made on time and that the plan will be completed. In either case, failure to make the payments in accordance with the confirmed plan may result in dismissal of the case or its conversion to a liquidation case under Chapter 7 of the Bankruptcy Code. With certain exceptions, the debtor has the right to dismiss the Chapter 13 case at any time.
After the meeting of creditors is concluded, the bankruptcy judge must determine at a confirmation hearing whether the plan is feasible and should be approved. Creditors may object to confirmation of the plan based on various grounds that are set forth in the Bankruptcy Code. In that instance, the bankruptcy court will hear and rule on the objections.
The Chapter 13 Discharge
The Chapter 13 debtor is entitled to a discharge upon successful completion of all payments under the Chapter 13 plan. In return for the willingness of the Chapter 13 debtor to undergo the discipline of a repayment plan for three to five years, a broader discharge is available under Chapter 13 than in a Chapter 7 case. As a general rule, the debtor is discharged from all debts provided for by the plan or debts that are disallowed, except for the following: (1) certain long-term obligations (such as a home mortgage); (2) debts for alimony or child support; (3) debts for most government-funded or guaranteed educational loans or benefit overpayments; (4) debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, which also refers to debts for restitution or a criminal fine included in a sentence on the debtor’s conviction of a crime. To the extent that these types of debts are not fully paid under the Chapter 13 plan, the debtor will still be responsible for them after the bankruptcy case has concluded.
The above information is an excerpt from an article entitled Your Day in Bankruptcy Court published by the Administrative Office of the U.S. Courts on behalf of the U.S. Courts. The full article can be found here.