Chapter 13 is available only for individuals with regular income to fund a monthly plan payment. Therefore, a sole proprietor can file Ch 13, but a corporation or limited liability company [LLC] cannot file Chapter 13. The goal is to restructure the debtor’s obligations through a plan the debtor offers to creditors. The plan takes either a three- or five-year “commitment period” to complete before a discharge can be issued. The debtor’s income must be enough to pay regular monthly living expenses and have some funds left to make the monthly plan payments.
Objectives of a Chapter 13
The three most common reasons for filing a Chapter 13 bankruptcy:
- To stop a foreclosure and save a home, mortgage arrears can be cured over time in a Chapter 13 plan. If a loan becomes due during the Chapter 13, the plan can provide for payment of entire debt.
- If the value of the debtor’s home is less than the balance owed on the 1st trust deed, Chapter 13 can be used to strip off a 2nd trust deed and other junior liens after the plan is completed.
- A debtor who earns too much income to pass the “means test” for Chapter 7 can file Chapter 13 and likely discharge some portion of the unsecured debts.
How Chapter 13 Works
The Chapter 13 petition is filed at the bankruptcy court where the debtor has a residence. A husband and wife can file a joint petition or one spouse may file individually. If only one spouse files, the income and expenses of BOTH married spouses must be disclosed in the debtor’s schedules.
Filing the petition automatically stays most creditor actions against the debtor or the debtor’s property. While the “stay” is in effect, creditors generally cannot begin or continue any foreclosure, lawsuit, repossession, or wage garnishment. Chapter 13 also provides a “co-debtor” stay that stops a creditor from trying to collect on a “consumer debt” from others who may also be liable with the debtor on the debt, such as a co-signor. A consumer debt is an obligation incurred for household or family purposes.
The debtor submits the plan, which is like a contract being offered to deal with creditor claims in the case. The plan may call for monthly payments to cure arrears on a mortgage. It can repay the current value of an automobile over time and provide only a dividend [a percentage payment] for unsecured claims. Once the plan is completed, the debtor will usually receive a discharge of the remaining unsecured debt.
A trustee is appointed to administer the case. The Chapter 13 trustee’s role is to collect the monthly plan payments from the debtor and distribute the funds to creditors according to the terms of the debtor’s plan once it has been confirmed by the court. A plan that is confirmed by the court is binding on all creditors.
Before the plan can be confirmed, a creditor’s meeting is held about 30 days after the petition is filed. The trustee runs the meeting and asks questions about the debtor’s income, his expenses, and the terms of the plan. Creditors may ask questions but typically do not appear at the meeting. Debtors are required to attend the meeting. Issues regarding the plan are usually resolved during or shortly after the creditor meeting. If there are no plan objections, a confirmation order is submitted to the court after the creditor meeting.
If the trustee or a creditor objects to the plan, a confirmation hearing is scheduled with the court. If the debtor is unable to modify the plan to satisfy the objection, the judge will determine whether the plan meets the requirements for confirmation. If the plan is not confirmed, the debtor may try to amend the plan, convert the case to Chapter 7, or let the case be dismissed. If the plan is confirmed by the judge, the Chapter 13 trustee begins distributing funds to creditors according to the plan, which is binding on all creditors. A plan may offer unsecured creditors less than 100% full payment of their claims.
The Plan and Creditor Claims
A plan is the debtor’s proposed contract for dealing with creditor claims. The plan may propose to cure arrears on real estate debts or, if the circumstances permit, to strip a junior loan off a property. A plan may repay taxes or provide for some partial payment of unsecured debts.
In order for a creditor to receive payment under the plan, they must file a proof of claim form with the court. Creditors have 90 days from the date of the creditor meeting to file a claim with the court. Unsecured creditors with dischargeable debts who miss the deadline will not receive any payment in the plan. If the debtor disagrees with the amount of the creditor’s claim, they can file an objection to the claim and ask the court to determine if the amount of the claim is correct.
The Automatic Stay
The automatic stay is like an injunction preventing a creditor from foreclosing on the debtor’s home or garnishing wages or repossessing assets. If the debtor fails to make mortgage payments after the case is filed, the mortgage creditor can bring a motion to set aside the automatic stay.
Completing The Plan
On occasion, changes in the debtor’s financial circumstances can affect the 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. Plan modifications after confirmation are not limited to a motion by the debtor. The trustee may also request plan modifications if, for example, the creditors do not all file claims or the claims that are filed add up to less than the amounts listed in the debtor’s schedules.
Once the court confirms the plan, it is the debtor’s responsibility to make certain the required plan payments are all tendered to the trustee. 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.
If the debtor fails to make plan payments, the debtor’s employer may be ordered to withhold plan payments from the debtor’s paycheck and send the funds to the Chapter 13 trustee. Furthermore, while confirmation of the plan entitles the debtor to keep their property, the debtor may not incur significant new debts without consulting the trustee, and a court order may be appropriate. Failure to make plan payments can 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 in order to be paid. Creditors who were provided for in the Chapter 13 plan, or creditors who failed to file a claim, may not initiate or continue legal action to collect the discharged obligations.
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. The 2005 amendments reduced the scope of the Chapter 13 discharge. Consequently, if a creditor proves that his claim is the result of fraud or breach of a fiduciary duty by the debtor, that debt will not be included in the Chapter 13 discharge at the end of the case.