Individual Debt Reorganization

Chapter 13 is sometimes called a “wage-earner’s plan” in that it allows a person who has a steady income to reorganize debts over a fixed period of time. This period is either three years, for those who earn under the state median, or five years for those who earn over that amount. It can be helpful in that it allows individuals to reorganize their debts without risking foreclosure on their home. Qualifying individuals cannot have more than $336,900 worth of unsecured debts, and less than $1,010,650 secured debts, although this is subject to adjustment on a periodic basis.

How to File

In order to file under Chapter 13, an individual must file in the bankruptcy court nearest his home, including financial information such as income and expenditure; an asset and liability statement; a statement of financial affairs, and details of current contracts and leases. Individuals must also provide a list of creditors, details of their income, property they own and monthly living expenses. If the individual filing for bankruptcy is married, they must also include their spouse’s financial information too, even if the spouse is not applying for bankruptcy. There are fees to pay: $235 for filing the petition, and $39 for administration. As with other bankruptcy fees they should be paid at the time of filing although it is possible to apply to pay in installments.

Role of the U.S. Trustee

Once the petition has been filed the U.S. trustee takes over the case. The trustee has the role of collecting the payments paid by the debtor each month and distributing them to creditors. The filing of the petition also triggers the “automatic stay” which has the effect of preventing creditors from being able to pursue the debtor for payments. However some actions can only be stopped for a short period of time.

Meeting of Creditors

The meeting of creditors will usually take place between 20 and 50 days after the petition is filed. The U.S. trustee then asks the debtor questions under oath. Creditors may also ask questions. Bankruptcy judges are not permitted to attend the meeting of creditors in the interests of preserving an unprejudiced viewpoint. For a creditor to be able to receive a share of the money that the U.S. trustee distributes, they must claim within 90 days after the meeting of creditors (in the case of a Government agency, it is 180 days.) Claims are divided into three categories: priority claims, which are taxes, bankruptcy fees, etc; secured claims, which are secured against collateral; and unsecured claims.

 

Reorganization Plan

The reorganization plan is normally filed at the same time as the petition or at the latest fifteen days afterwards. In most situations, the plan has to pay the priority claims in full. In order to keep property that is the subject of a secured loan, the plan must allow for the creditor to receive not less than the value of the collateral. If there is a mortgage, the repayment for the mortgage can be spread over a longer period than the life of the plan, subject to one caveat: the total amount of the arrears must have been repaid to the creditor by the end of the plan.

Discharge

Once the plan has been agreed, it is up to the debtor to make it work. Payments are made either by paying the U.S. trustee or straight from the payroll source. The latter option is more likely to make the plan work, as payments are always on time. Once all payments have been made under the plan, the debtor will be entitled to a discharge as long as certain criteria have been met.

Laws relating to discharge under Chapter 13 are very complicated. It is therefore particularly important to consult with a specialist bankruptcy attorney before making this kind of financial decision.
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