Chapter 13 is only available to individuals (vs. partnerships or corporations) with regular income from any source, not just wages. A sole proprietor can also file a chapter 13. The goal is to reorganize by paying creditors through a plan that requires monthly payments for a minimum of three and no more than five years. Unsecured debts must be $336,900, or less, and secured debts $1,010,650, or less, to qualify for chapter 13.
How Chapter 13 Works
A chapter 13 begins with a petition filed at the bankruptcy court where the debtor has a domicile or residence. The debtor files schedules of assets and liabilities, a schedule of current income and expenditures, and a statement of financial affairs. A husband and wife can file a joint petition or may file individually. If only one spouse files, the income and expenses of the non-filing spouse must be disclosed in the debtor's schedules.
The filing of the petition under chapter 13 automatically stays most actions against the debtor or the debtor's property. While the "stay" is in effect, creditors generally cannot initiate or continue any foreclosure, lawsuit, repossession, or wage garnishment. Chapter 13 provides a "co-debtor" stay which stops a creditor from trying to collect a "consumer debt" from another individual who is also liable with the debtor on the debt. A consumer debt is an obligation incurred for consumer, as opposed to business, purposes.
A debtor facing foreclosure can stop the foreclosure sale by filing chapter 13. The chapter 13 plan permits the debtor to cure defaults on real estate debts by repaying the arrears within a reasonable period of time [usually within 36 months]. If a trust deed becomes all due during the chapter 13, the plan can provide for payment of entire debt.
Upon filing the petition, a trustee is appointed to administer the case. The chapter 13 trustee's role is to collect plan payments from debtors and make distributions to creditors according to the debtor's plan. The debtor must file a plan with the court and begin making plan payments to the trustee. The plan provides for regular monthly payments to the trustee and must ultimately be confirmed by the court.
Upon confirmation, the trustee begins distributing plan funds to creditors according to the terms of the plan. A plan may offer unsecured creditors less than full payment of their claims. However, the debtor's ability to modify automobile loans was significantly eroded by the 2005 amendments to the bankruptcy laws.
A meeting of creditors is held in every case, and the debtor is examined under oath. The meeting is held about 30 days after the petition is filed. The trustee conducts the meeting and asks questions about the debtor's financial affairs and the proposed plan. Creditors may attend and ask questions. Debtors must attend, and if a husband and wife filed jointly, both must be present. Problems with the plan are typically resolved during or shortly after the creditors' meeting. If there are no plan objections, a confirmation order is submitted at the creditors' meeting.
If the trustee or a creditor objects to confirmation of the plan, a hearing is scheduled before the court. The bankruptcy judge will determine whether the plan meets the legal requirements for confirmation. A variety of objections may be made, but the most frequent objections are: the total plan payments are less than creditors would receive if the debtor's assets were liquidated; or the debtor's plan does not commit all of the debtor's projected disposable income for the necessary commitment period.
The debtor must commit all projected "disposable income" during the time the plan is in effect. Disposable income is defined as income not reasonably necessary for the maintenance or support of the debtor or dependents. If the debtor operates a business, disposable income excludes those sums necessary to pay ordinary operating expenses.
If the plan is confirmed by the bankruptcy judge, the chapter 13 trustee begins distributing funds to creditors according to the plan. If the plan is not confirmed, the debtor may attempt to modify the plan, convert the case to a chapter 7, or let the case be dismissed. New limits on multiple filings make it unwise to allow the case to be dismissed.
Making The Plan Work
On occasion, changed circumstances will affect a debtor's ability to make plan payments, or a debtor may have inadvertently omitted a creditor. In such instances, the plan may be modified either before or after confirmation. Modification after confirmation is not limited to a motion by the debtor. The trustee may also request plan modifications.
The provisions of a confirmed plan are binding on the creditors. Once the court confirms the plan, it is the responsibility of the debtor to make certain the plan is consummated. Chapter 13 is not designed to solve financial problems that arise after the case is filed. The debtor must make regular payments to the trustee, which will require living on a fixed budget for the length of the case.
The debtor's employer may be required to withhold the amount of the plan payment from the debtor's paycheck and send it to the chapter 13 trustee. Furthermore, while confirmation of the plan entitles the debtor to retain property, the debtor may not incur any significant new debt without consulting the trustee, and a court order may be appropriate. Failure to make plan payments may result in dismissal of the case.
The Chapter 13 Discharge
The chapter 13 debtor is entitled to a discharge upon successful completion of all payments. The discharge releases the debtor from all claims provided for in the plan or disallowed by the court. It is the creditor's duty to file a claim in the case. Those creditors who were provided for in full or in part under the chapter 13 plan, even if not paid because they failed to file a claim, may not initiate or continue legal action to collect the discharged obligations.
Pursuant to the 2005 amendments, the scope of the chapter 13 discharge has been reduced. Debts that are proven to be the result of fraud or breach of a fiduciary duty by the debtor may no longer be discharged in a Chapter 13. As before, the debtor is not discharged from debts for alimony or child support, student loans, debts arising from death or personal injury caused by driving while intoxicated or under the influence of drugs, and debts for restitution or a criminal fine. To the extent that these types of debts are not fully paid pursuant to the chapter 13 plan, the debtor will still be responsible for the unpaid balance on these debts after the chapter 13 case has concluded.