Chapter 13: reorganization

Law Office of George Peter Rose

Initial Considerations – Chapter 13 is designed for individuals with regular income who desire to pay their debts, but are currently unable to do. So, the purpose of a Chapter 13 is to enable financially distressed individual debtors under court supervision and protection to propose 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 3-5 year period of time. During this time, creditors are prohibited from starting, or continuing, any collection against the debtor. In no case may a repayment plan provide for payments over a period of time that is longer than five (5) years. Any individual, even if self-employed or operating an unincorporated business, is eligible for Chapter 13 relief so long as his or her unsecured debts are less than $360,475.00, and secured debts are less than $1,081,400.00.  These dollar amounts will periodically increase.  A corporation or partnership cannot file a Chapter 13 bankruptcy.

 

An individual cannot receive a discharge in Chapter 13 if they have previously received a discharge in Chapter 7 within the last four (4) years, or a previous discharge in Chapter 13 within the last two (2) years.

Procedure – A Chapter 13 case begins with the filing of a petition with the bankruptcy court in the area where the debtor lives. A husband and wife may file a joint petition, or individual petitions. Unless the court orders otherwise, the debtor must file with the court the required bankruptcy schedules and a statement of financial affairs. 

 

In a Chapter 13 proceeding, the primary role of the Chapter 13 trustee is to serve as a disbursing agent, collecting payments from debtors, and making distributions to creditors.  Creditors receive notice of the filing of the petition from the court clerk or debtor’s counsel.

The Automatic Stay – 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 lawsuit, wage garnishment, or even make telephone calls demanding payments. After the commencement of a Chapter 13 case, unless the bankruptcy court authorizes it, a creditor may also not seek to collect a “consumer debt” from any individual known as a co-debtor who is jointly liable with the debtor.

 

Because of the automatic stay, an individual debtor who is faced with a threatened foreclosure of the mortgage on their home can prevent the foreclosure by filing a Chapter 13 petition. Chapter 13 then affords the debtor the opportunity to cure defaults on long-term home mortgage debt by bringing the payments current over a reasonable period of time.

The Chapter 13 Plan – The debtor must file a plan of repayment known as the “Chapter 13 Plan”. The Chapter 13 plan must provide for the full payment of all priority claims, with certain exceptions.  All Chapter 13 plans must be approved by the court, and must provide for payments to the trustee on a regular basis, typically monthly. The trustee then distributes the funds to creditors according to the terms of the plan, which may offer creditors less than full payment on their claims. The debtor is obligated to pay a monthly payment to the Chapter 13 Trustee which is at least equal to the debtor’s monthly “disposable income,” during the period in which the plan is in effect. Disposable income is defined as income not reasonably necessary for the maintenance or support of the debtor or the debtor’s dependents. In other words, it is the difference between the debtor’s monthly net income, and the debtor’s normal, reasonable monthly budget. If the debtor operates a business, the debtor’s “budget” would include those amounts which are necessary for the payment of ordinary business operating expenses.

Within 30 days after the filing of the Chapter 13 petition, even if the plan has not yet been approved by the court, the debtor must start making payments to the trustee. A meeting of creditors is usually held 20 to 45 days after the petition is filed. The debtor must attend this meeting at which creditors are permitted to appear and to ask questions regarding the debtor’s financial affairs and the proposed terms of the plan. If a husband and wife have filed a joint petition, they must both attend the creditors’ meeting. The Chapter 13 trustee, or the trustee’s representative, will also attend this meeting and question the debtor on the same matters.  If there are problems with the plan, they are typically resolved during or shortly after the creditors’ meeting. Generally, problems may be avoided if the petition and plan are complete and accurate and the trustee has been consulted prior to the meeting.

After the meeting of creditors is concluded, the bankruptcy judge must determine at a confirmation hearing – typically approximately 30-60 days following the meeting of creditors – whether the proposed plan is feasible and meets the standards for confirmation set out in the Bankruptcy Code. Creditors may appear and object to confirmation. A variety of objections can be made to the plan. Usually objections can be resolved through negotiations with creditors and/or the Trustee, and without court intervention.

If the plan is confirmed by the bankruptcy judge, the Chapter 13 trustee begins to make monthly distribution to creditors of the funds received from the debtor. If the plan is not confirmed, the debtor has a right to file a modified plan. The debtor also has a right to convert the case to Chapter 7. If the plan or modified plan is not confirmed and the case is dismissed, the court may authorize the trustee to retain a specified amount for costs, but all other funds paid to the trustee are returned to the debtor.

On occasion, changed circumstances will affect a debtor’s ability to make plan payments, a creditor may object or threaten to object to a plan, or a debtor may inadvertently have failed to list all creditors. In such instances, the plan may be modified before or after confirmation pursuant to a court order.

Plan Payments:  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 by making regular payments to the trustee, which may require adjustment to living on a fixed budget for a prolonged period. The plan payment can be made by having the debtor’s employer automatically withhold the amount of the payment from the debtor’s paycheck. The payment can also be made by having the debtor’s bank pay it automatically on a monthly basis, or the debtor can personally make the payment. Experience has shown that having plan payments automatically deducted from the debtor’s paycheck, or the debtor’s bank account, increases the likelihood that payments will be made on time and that the plan will be completed. Failure to make the payments may result in dismissal of the case or its conversion to a liquidation case under Chapter 7 of the Bankruptcy Code.

While the Chapter 13 plan is in place, the debtor should not incur any significant new debt obligations without obtaining prior court approval, because such debt obligations may have an impact upon the debtor’s ability to complete the Chapter 13 plan.

The Chapter 13 Discharge – The bankruptcy law regarding the scope of the Chapter 13 discharge is complex and has recently undergone major changes. The Chapter 13 debtor is entitled to a discharge upon successful completion of all payments under the Chapter 13 plan. The discharge has the effect of releasing the debtor from all debts provided for by the plan or disallowed, with limited exceptions. Generally, those creditors who were provided for in full or in part under the Chapter 13 plan may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.

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 disallowed, except certain long-term secured obligations (such as a home mortgage), debts for alimony or child support, debts for most government-funded or guaranteed educational loans or benefit overpayments, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, debts arising from fraud by the debtor, and debts for restitution included in a sentence on the debtor’s conviction of a crime. To the extent that these types of special debts are not fully paid pursuant to the Chapter 13 plan, the debtor will still be responsible for payment of any balance after the bankruptcy case has concluded.

 

 

 

Over 25 Years Bankruptcy Experience

417 South “G” Street

Tacoma, WA 98405

Phone: (253) 572-1657

Fax: (253) 272-1472

While the information presented in this web site is accurate as of the date of publication, it should not be cited or relied upon as legal authority.  It should not be used as a substitute for reference to the United States Bankruptcy Code (title 11, United States Code) and the Federal Rules of Bankruptcy, both of which may be reviewed at local law libraries, or to local rules of practice adopted by each bankruptcy court.  Finally, this web site should not substitute for the advice of competent legal counsel.  If you have further questions, please contact the Law Office of George Peter Rose at (253) 572-1657 or email us at prose@roselaw.comcastbiz.net.

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